What characterizes a natural monopoly?

A natural monopoly is characterized by a situation where economies of scale enable one firm to supply the entire market more efficiently than multiple firms could. This typically occurs in industries with high fixed costs and low marginal costs. For example, utilities such as water and electricity supply often have significant infrastructure investments that create high barriers to entry for other competitors. When a single firm can serve the entire market demand at a lower cost than two or more firms, it results in a more efficient allocation of resources.

In contrast, the other options present different concepts. A market served by inefficient firms would not create the same conditions as a natural monopoly since it would imply multiple players, none of whom can reach the economies of scale needed to dominate the market. A temporary monopoly suggests that the monopoly will end, which doesn't align with the persistent characteristics of a natural monopoly. Lastly, while a regulated market may have fixed prices, this does not define the distinct economic nature of a natural monopoly itself, which is rooted in cost efficiencies and market structure rather than regulatory frameworks.