What characterizes a natural monopoly?

A natural monopoly is characterized by a situation where a single firm can supply the entire market at a lower cost than multiple firms could. This often occurs in industries with high fixed costs and low marginal costs, such as utilities (water, electricity, and gas). In these cases, the infrastructure required to provide the service — pipelines, power lines, etc. — represents significant costs that do not significantly increase with more customers. Therefore, having one firm serve the entire market leads to economies of scale, making it more efficient for that one firm to operate rather than having multiple firms competing in the same space, which could lead to higher overall costs and inefficiencies.

In contrast to the correct choice, the other options do not appropriately capture the essence of a natural monopoly. While multiple firms supplying a market may lead to competition, it does not result in lower overall costs, which is central to the identification of a natural monopoly. A firm that is unable to compete with others may suggest market conditions leading to monopolistic practices but does not define the natural monopoly situation itself. Lastly, government regulation might occur in markets with natural monopolies to protect consumers from potential abuse of market power, but regulation does not define the market structure as a natural monopoly.