ABSTRACT
The previous chapter discussed two alternative approaches to the natural monopoly problem, namely, public ownership, and private ownership accompanied by regulation. Both approaches belong to a wider class of problems involving principal-agent relationships. In the case of public ownership, a major difficulty is the specification and enforcement of a set of incentives and constraints which ensure internal efficiency. In the regulated private ownership case, even if internal efficiency is less of a problem there is a major difficulty in specifying and enforcing a set of regulatory constraints which ensure allocative efficiency. These difficulties highlight the natural monopoly problem of ensuring internal and allocative efficiency in a single-producer market. For these reasons an alternative approach involving the introduction of competition into natural monopoly situations has been proposed and it is with this that the present chapter is concerned.
