The Economist’s glossary of terms says that a natural monopoly occurs: “Because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scale available in that market.
They may also arise in industries were unique raw materials and/or technology are required. Natural monopolies exist where fixed costs and/or startup costs are extremely high. If there is just one water company in a town or region, the cost per customer is usually lower than would be the case if there were rival suppliers. Water distribution, for example, requires digging up huge areas or ground and laying down a vast network of pipes to deliver water to people’s homes, businesses, golf clubs, parks, and other entities. Natural monopolies are common where expensive infrastructure has to be installed and maintained.
A natural monopoly exists when it makes more economic sense for just one company to supply the whole market compared to having two or more competitors, mainly because of the economies of scale that are available in that market.
