A natural monopoly occurs when the most efficient number of firms in the industry is one.
A natural monopoly will typically have very high fixed costs meaning that it impractical to have more than one firm producing the good.
An example of a natural monopoly is tap water. It makes sense to have just one company providing a network of water pipes and sewers because there are very high capital costs involved in setting up a national network of pipes and sewage systems. To have two different companies offering water, wouldn’t make sense as the average cost would be very high compared to just one. There would also be the inconvenience of having two firms dig up the road to lay a duplicate set of water pipes.
Are they justified?
Economically speaking, they are not because there's only one firm and it has so much market power that it can charge any price it wants to, but this will lead to market failure.
Natural monopolies are uncontestable and firms have no real competition. Therefore, without government intervention, they could abuse their market power and set higher prices. Therefore, natural monopolies often need government regulation.
