Final answer:
Natural monopolies are characterized by economies of scale, which allow the monopoly producer to lower costs and dominate the market, limiting competition.
Step-by-step explanation:
A natural monopoly is characterized by economies of scale, which refers to a situation where the average cost decreases as the level of output increases. This means that as the monopoly producer increases its production, it can lower its costs and charge lower prices compared to potential competitors. As a result, the monopoly is able to dominate the market and limit competition.
For example, in industries like water or electricity distribution, once the infrastructure is in place (such as water pipes or electrical wires), the marginal cost of serving an additional customer is relatively low. This allows the natural monopoly to provide services more efficiently than if there were multiple smaller producers duplicating infrastructure.
In summary, natural monopolies are characterized by economies of scale, which allow the monopoly producer to lower costs and dominate the market, limiting competition.