market, a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an

additional customer is very low, once the fixed costs of the overall system are in place. This results in situations

where there are substantial economies of scale. For example, once a water company lays the main water pipes

through a neighborhood, the marginal cost of providing water service to another home is fairly low. Once the

electric company installs lines in a new subdivision, the marginal cost of providing additional electrical service

to one more home is minimal. It would be costly and duplicative for a second water company to enter the

market and invest in a whole second set of main water pipes, or for a second electricity company to enter the

market and invest in a whole new set of electrical wires. These industries offer an example where, because of

economies of scale, one producer can serve the entire market more efficiently than a number of smaller
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