What situation occurs when there are sufficient economies of scale to support only one firm in the market?

A natural monopoly exists when a single firm can provide a good or service to an entire market at a lower cost than any potential competitor due to economies of scale. This situation typically arises in industries that require substantial infrastructure or high fixed costs, such as utilities (water, electricity) or railways.

In these cases, as the firm produces more, the average cost of production decreases, which allows one firm to meet the total demand in the market more efficiently than multiple firms could. This efficiency makes it impractical for new entrants to compete, because they would have higher average costs than the established firm. Thus, a natural monopoly is characterized by the fact that having just one firm is more beneficial for consumers and the economy than having multiple firms that would just duplicate infrastructure and lead to higher costs.

This concept contrasts with artificial monopolies, which arise from specific legal protections or business practices that prevent competition, rather than through economic efficiency. The terms perfect monopoly and oligopoly describe different market structures that do not revolve around the conditions of economies of scale that characterize natural monopolies.