Productive efficiency
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Productive efficiency means producing output at the lowest possible average cost (AC), the cost per unit. That happens at the minimum point of the AC curve. No resources are wasted in making the goods.
Perfect competition achieves it in the long run, because competition pushes price down to the minimum of long-run average cost. Monopolies and firms under monopolistic competition usually do not. Monopolistic competition ends up with excess capacity, producing to the left of minimum AC.
Example
A monopoly shielded from rivals may overstaff and let its costs drift up. This slack is called X-inefficiency (Leibenstein, 1966). Such a firm is not productively efficient, even if it makes a profit.
Don't confuse with
- Allocative efficiency: producing the goods society values most, where P = MC. A firm can make goods at the lowest cost (productive efficiency) and still produce too little of them (allocative inefficiency).
Related concepts
- Pareto efficiency
- Pareto improvement
- Allocative efficiency
- Welfare economics
- Kaldor-Hicks efficiency
- Social welfare function
- Theory of the second best