The public firm and strategic interaction: The case of public wastewater management

Usually public monopoly firms have the task of providing services while covering costs with the revenue from charges paid by users. From the literature it is known that if users take the charge as given, the zero-profit constraint of the public firm results in an inefficient allocation of resources. In this paper, it is shown that the inefficiency will be completely corrected if the not-for-profit supplier faces a surplus-maximising single purchaser. The model has been applied to analyse the efficiency of public wastewater management, but it also has regulatory implications for other markets that cannot be liberalised.