The focus of this paper is the extent to which the purchaser-provider
split and the creation of a market in the provision of health care can
be expected to bring about greater efficiency within the new NHS. The
starting point is a theoretical discussion of markets and competition
. In particular, emphasis is placed upon the economic model of perfect
competition. It is argued that because of the existence of externalit
ies, uncertainty and a lack of perfect information, an unregulated mar
ket in health care will almost certainly fail. In view of this. the im
perfect provider markets of monopoly and contestable markets, which ar
e of particular relevance to health care, are discussed. A description
of the new health care market and the principal actors within it is f
ollowed by an evaluation of the new health care market. It is argued t
hat in view of the restrictions to competition that exist between prov
iders, some form of price regulation will be necessary to prevent mono
polistic behaviour in the hospital sector. Regulation of purchasers is
also suggested as a means of improving efficiency. It is concluded th
at competition may be a necessary condition for increased efficiency i
n health care provision, but is not sufficient in itself. Other incent
ives in the hospital sector are necessary to assist the market process
and to enhance its impact on efficiency.