How Does A Government Contain Market Power?

The traditional public interest view of economic regulation is normative: that regulatory measures should be taken to reduce excessive market power. More specially, government should regulate industries where there are few firms to ensure vigorous rivalry. The government should regulate industries particularly in the extreme case of natural monopoly, especially where the monopoly occurs for necessities that have a low price elasticity of demand.
An important example of a natural monopoly is local water distribution. The cost of gathering water, building a water distribution system, and piping water into every home is sufficiently great that it would not pay to have more than one firm provide local water service, so this is a natural monopoly. The government, more often, provides sometimes water service it is provided by a regulated privately owned Water Company.
Another type of natural monopoly can occur when an industry has economies of scope, which rise when a number of different products can be produced more efficiently together than by separate firms. For example, transport equipment firms show economies of scope, a firm producing cars and trucks has a cost advantage in producing buses and tanks. Why? Because specialized knowledge and machinery are shared across the different products. These firms have economies of scope is production of ground based transport systems.