A natural monopoly occurs when a single company is the most efficient way to supply a good or service. In this situation, one large supplier has a cost advantage over any potential competitors.
Examples of natural monopolies include water, gas and electricity suppliers. The cost of creating networks that supply these goods makes it extremely difficult for smaller companies to enter these industries and compete with the large supplier.
Natural monopolies often give these large companies unfair market power, leading to government regulation of these industries. Without this regulation, the management of these firms may potentially make decisions that could have a negative effect on the community.