Final answer:
A natural monopoly is a situation where one producer can serve the entire market more efficiently than multiple smaller producers due to economies of scale. It occurs in industries like water and electricity due to the low marginal cost of adding customers once the fixed costs are in place.
Step-by-step explanation:
A natural monopoly is a situation in which economies of scale are large relative to the quantity demanded in the market. This occurs when one producer can serve the entire market more efficiently than multiple smaller producers. A classic example is the water or electricity industry, where the marginal cost of adding an additional customer is very low once the fixed costs of the system are in place.
For instance, once the main water pipes or electricity lines are installed in a neighborhood, it would be costly and duplicative for a second water or electricity company to enter the market and invest in a duplicate set of infrastructure. This makes it difficult for new companies to compete, leading to a natural monopoly.