A natural monopoly is a special case where one large business can supply the entire market at a lower unit cost contrasted with multiple providers.

This is because of the nature of costs in a natural monopoly industry. Typically there are very high fixed costs and low marginal costs.

For example, the supply of water or electricity to houses and businesses involves building a big network infrastructure.

As a result, fixed costs are enormous but the marginal cost of adding an extra user is very low.

Therefore, the average total cost will continue to fall as extra users are added to the network. This is an internal economy of scale.

This means thatlong run average cost (LRAC) may fall across all ranges of output. Only one firm might reach the minimum efficient scale.