ABSTRACT
All this analysis assumes that firms carefully and informedly minimise costs. It is often suggested, however, that in the absence of foreign competition firms become lazy and do not actually operate on their production frontiers. This seems particularly likely for monopolists, and has been called X-inefjciency by Leibenstein (1966). In this case, opening free trade will raise the value of output not only through specialisation, but also by pushing production out onto the transformation curve. This ‘salutary jolt’ was frequently advanced as a reason for Britain joining the EEC, and for the completion of the European internal market in 1992.
