Short Answer 
A natural monopoly occurs when a single company efficiently provides a service due to high fixed costs and low marginal costs, leading to challenges like price increases and lack of innovation. Government regulation is essential to address these challenges by ensuring fair pricing, setting performance standards, and encouraging competition.
Step 1: Understanding Natural Monopoly
A natural monopoly occurs when a single company can provide a product or service more efficiently than multiple companies, often due to high initial costs and significant economies of scale. In this scenario, the average cost of production decreases as the company serves more customers. Important characteristics include:
- High fixed costs that do not change with the level of output.
- Low marginal costs, meaning adding more customers does not significantly increase costs.
Step 2: Examining the Challenges
Natural monopolies can lead to several challenges that negatively impact consumers and the market. These challenges arise from the lack of competition and the unique structure of the monopoly, such as:
- The ability to raise prices without concern for customer needs.
- A lack of incentive to enhance goods and services, leading to stagnation.
- Reduced production increases if profit margins are not met.
Step 3: Addressing Government and Consumer Concerns
While natural monopolies can streamline efficiency, their market power necessitates regulation to protect consumers. Government intervention can help mitigate some of the challenges posed by these monopolies, ensuring fair pricing and quality improvements. Key approaches include:
- Regulating prices to prevent excessive charges to consumers.
- Setting performance standards to ensure service enhancements.
- Facilitating competition where feasible to foster market dynamics.