What characterizes a 'natural' monopoly such as a local electricity provider?

A 'natural' monopoly is characterized primarily by long-run average total costs declining as output increases. This situation occurs when a single firm can produce the entire market's output at a lower cost than multiple firms could due to high fixed costs and relatively low marginal costs. As the company increases production, the average total cost spreads over more units, enabling it to provide services more efficiently and cheaper than any potential competitors.

The concept involves significant economies of scale, which means that larger firms can operate more efficiently than smaller firms. In a natural monopoly, the advantages of being a single supplier outweigh the benefits of competition, as the cost structure is such that new entrants would struggle to match the established firm's pricing without incurring higher costs.

While economies of scale exist over a wide range of output is related to the concept of a natural monopoly, it is the continuous decline in long-run average total costs that directly explains why a single firm can dominate the market effectively. Therefore, that characteristic is fundamental in defining what makes a monopoly 'natural.'