Firms are characterized by declining marginal costs, high capital costs and high initial fixed costs. The natural monopoly may be temporary or permanent. Externality is the second form of market failure. In this case one must compare private costs to public costs. The costs are unintended and not compensated.
Pollution is an example.
Alternatives to regulation in these instances are private lawsuits, taxes and subsidies. Equity is the third form of market failure that justifies regulation. Although free enterprise is based on contract, contracts do not always work. Defects with contracts are coercion, discrimination, bargaining power disparity and information disparity. Labor contracts are a special case of economic duress.