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Regional Science and Urban Economics 30 (2000) 405–428 www.elsevier.nl/locate/econbase Potential competition and public sector performance Robert W. Helsley*, William C. Strange Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mall, Vancouver, B .C. V6 T 1Z2 Canada Received 12 April 1999; received in revised form 14 January 2000; accepted 16 March 2000 Abstract This paper considers the roles of actual and potential competition in private government formation. Higher public sector costs encourage formation. Public sector rent seeking discourages formation. Although aggregate welfare always rises, nonmembers may be harmed by private government, and this effect is larger the greater is the public sector cost disadvantage. The public sector may strategically choose to deter the formation of private government as in conventional models of entry. However, it may also make strategic choices that encourage a competing private government to form. Thus, mixed markets are fundamentally different than their purely private counterparts.  2000 Elsevier Science B.V. All rights reserved. Keywords : Privatization; Public goods; Mixed markets; Entry deterrence JEL classification : H11; H41; H73; L33 1. Introduction This paper concerns privatization, and like most papers on this subject it must begin with a definition. In characterizing privatization, Vickers and Yarrow (1991) write that there are three kinds: ‘‘the transfer to the private sector of state-owned enterprises operating in competitive product markets . . . ; the transfer to the private *Corresponding author. Tel.: 1-604-822-8325; fa