Final answer:
X-inefficiency occurs when a firm's cost exceeds the minimum necessary for a given output, indicating resource misuse and higher production costs. It contrasts with allocative efficiency, where production aligns with social benefit.
Step-by-step explanation:
X-inefficiency occurs when a firm operates at a cost that is higher than the lowest cost for a particular level of output. This concept is indicative of a situation where a firm is not using its resources to their full potential, leading to higher production costs than necessary. For example, if at point R, a firm is producing goods but could produce more at point C with the same resources, then point R indicates productive inefficiency. The firm could achieve higher education on the horizontal axis (E2 is greater than E1) and healthcare on the vertical axis (H₂ is greater than H₁) if it chose point C over R.
Another related concept is allocative efficiency, which occurs when the price of the good equals the marginal costs of production (P = MC). If firms produce a greater quantity than this allocatively efficient point, marginal costs would increase, and the price would be less than the marginal cost (P < MC). This situation implies that resources are being wasted as the costs of additional production exceed the societal benefits, represented by what consumers are willing to pay.