Introduction

Market competition is driven by the pursuit of profit. Through one of the marvels of economic life, when competition can function perfectly this profit-seeking behavior is harnessed to provide a maximum of economic welfare. Economic welfare is seldom profitable to pursue directly, however, and incentives having this purpose are hard to develop, so when competition cannot operate well, alternative institutions may not be any more effective at promoting welfare. We know that economic welfare is a sophisticated conception that can be elusive to measure, and alternative institutions can be expected to have other goals, goals that do not serve the general welfare reliably.

The competitive process must be seen as a regulator of economic activity in evaluating other means of regulation, so we begin with a brief review of competition and how it brings about the pursuit of economic welfare. For one reason or another, competition may not be relied upon, and instead monopoly franchises may be awarded with governmental protection from entry by others. We examine the general difficulty of pursuing economic welfare through political institutions, and also how inimical to welfare their major instrument, the statutory monopoly, may be. We describe information and incentive schemes that are intended to induce desirable behavior in protected monopoly markets. Under certain conditions one aspect of competition, free entry, can force pursuit of welfare even in markets where only one supplier is the lowest cost form of market organization.