Productive inefficiency refers to the situation in the market when the firms are not producing at minimum per unit costs. It happens when the market is working below its potential that is not making use of all the resources as in case of a firm with market power which charges prices above average costs incurred.

Allocative inefficiency arises when the consumers are paying prices greater than per unit costs. A firm with market power will produce where marginal cost is equal to the marginal revenue and not at a price equal to marginal cost. As a firm having market power usually fixes price above average costs to maximize the profits.

Dynamic inefficiency happens due to the lack of incentive of the firms to reduce their costs. A firm having profit-maximizing motive will always produce less quantity of goods and services which leads to the higher costs of production. Due to this, a firm will not be able to achieve the economies of scale.