and C. Although firm B is at MES, it is not producing efficiently and suffers a higher
average cost per unit produced. The distance ab represents x-inefficiency, a measure
of the degree to which costs are higher than they need be. Nevertheless, firm
B still maintains a cost advantage over firm C. Firm C is fully efficient, yet suffers a
cost disadvantage by producing at a relatively low level of output. If firm C could
increase output and maintain efficiency, it might gain a cost advantage over firm B.
X-inefficiency, or organisational stock, could not exist in the long run in fully
competitive markets, as in such situations the firm must be fully efficient to survive.
It can exist, however, in less competitive markets, where the firm may have
the discretion not to minimise cost. In such circumstances it might even be found
that management pursues its own goals and spends more than absolutely necessary
to achieve a given level of output.