A natural monopoly exists when:

• A. firms in the market produce identical products
• B. there are many buyers and sellers in the market
• C. a single firm can supply the entire market at a lower cost than multiple competing firms
• D. government regulations prohibit entry of new firms into the market

Answer: (C)

Verified step by step guidance

1. Understand the concept of a natural monopoly: it occurs when a single firm can supply the entire market demand at a lower cost than multiple firms could, due to economies of scale over the relevant range of output.
2. Recognize that natural monopolies typically arise in industries with high fixed costs and low marginal costs, making it inefficient for multiple firms to operate simultaneously.
3. Evaluate the given options by comparing them to the definition of a natural monopoly. For example, identical products and many buyers and sellers describe perfect competition, not a natural monopoly.
4. Note that government regulations prohibiting entry may exist in natural monopolies but are not the defining characteristic; the key is the cost structure that favors a single supplier.
5. Conclude that the correct defining feature of a natural monopoly is that a single firm can supply the entire market at a lower cost than multiple competing firms, which aligns with the economic definition.