Final answer:
A natural monopoly is formed when a market is most efficiently served by a single firm due to economies of scale and the high cost of duplicating infrastructure. This is common in utility industries where once the main system is established, the marginal cost of adding customers is quite low.
Step-by-step explanation:
A natural monopoly occurs when the quantity demanded in a market is sufficient for only a single firm to operate at the minimum of the long-run average cost curve. This means that any smaller firm would have higher average costs and could not compete, while any larger firm would produce excess quantities that the market does not demand. Economies of scale play a crucial role in creating a natural monopoly. In industries such as utilities, where once the initial investment in infrastructure is made, the marginal cost of servicing an additional customer is very low. Therefore, duplicating the infrastructure is not economically viable for another company since the incumbent can serve everyone more efficiently.
For example, if a water company installs pipes in a neighborhood, the cost of supplying water to an additional household is minimal. If another company were to enter the market, it would have to invest in a new network of pipes, which would be costly and duplicative. Hence, a single firm is most efficient for such markets, and that explains why the efficient number of firms is one.