What is a natural monopoly?

A natural monopoly is a market condition where one firm can provide the entire market's demand at a lower cost than multiple smaller firms. This situation is often due to economies of scale, high fixed costs, or decreasing production costs with increased output. High entry and exit barriers, typically due to substantial startup costs, are another characteristic feature. A classic example is a utility company, like a water supplier, which can deliver services at lower costs than multiple firms owning separate infrastructures. As natural monopolies can lead to high customer prices due to the absence of competition, they are usually regulated by government bodies to prevent the abuse of monopoly power and ensure fair pricing.