In some contexts, the marginal cost of a person using a product or service is very low while the fixed costs of providing the product or service are high.

a) Illustrate and explain with the help of a figure how and why this tends to lead to a so-called natural monopoly (you can assume that the low marginal cost is constant). Also give an example of a product or service that you consider to have these characteristics.

b) Show in your figure what price a profit-maximizing company in a natural monopoly market chooses to set if pricing is not regulated. Show any welfare losses and explain where they consist of.

c) Now imagine that the state wants to regulate pricing in this market. There are two main ways to do this: average cost pricing and marginal cost pricing. Describe the advantages and disadvantages of each type of price regulation.