Final answer:
A natural monopoly is characterized by declining average costs as production expands, typically due to high fixed costs relative to variable costs, leading to a single firm being the most efficient provider for the entire market demand.
Step-by-step explanation:
A defining characteristic of a natural monopoly is that average costs fall as production expands. This happens when fixed costs are high compared to variable costs, allowing one firm to supply the total market demand at a lower cost than if the market were divided among multiple firms. As a result, splitting up a natural monopoly would increase the average cost of production and lead to higher prices for customers.
Furthermore, a natural monopoly occurs when the range of outputs that satisfies market demand coincides with declining average costs, and the quantity demanded is only enough for a single firm to operate at the minimum of the long-run average cost curve. This makes such a monopoly challenging to regulate, since allowing competition could result in inefficiencies and higher prices.