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Not obtaining the maximum output from the use of resources. Inefficiency is costly to the economy. Formally, inefficiency implies that the economic equilibrium is not Pareto efficient. Inefficiency can arise at three levels. First, factors of production can be allocated across firms in a manner that does not secure the maximum output from those inputs. Second, inefficiency in the product mix means that inputs are being used to produce the wrong combinations of goods and services. Third, there can be allocative inefficiency in the distribution of goods and services between consumers. In addition to these forms of inefficiency there can also be X-inefficiency, or organizational slack, which means that enterprises are producing the right outputs, but are using an unnecessarily high level of inputs.

Subjects: Economics.

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