What characterizes a natural monopoly?

A natural monopoly is characterized by a market situation where a single firm can supply the entire market demand for a good or service at a lower cost than multiple competing firms. This arises typically due to high fixed costs and significant economies of scale in production, meaning that as the output increases, the average cost of production decreases.

In the context of pricing, a natural monopoly typically faces regulatory oversight because its market power can lead to the setting of higher prices than in competitive markets. Thus, there is little freedom for a natural monopolist to set prices without consideration of regulatory limits. Regulatory bodies may impose price caps or require that prices reflect average costs to protect consumers from potential exploitation.

Consequently, the characteristic that best typifies a natural monopoly is the limited freedom in setting prices, as external regulatory forces often play a significant role in determining pricing structures. This ensures an attempt to maintain fair access to essential services that a natural monopoly might provide, such as utilities or public transportation.