Question

Coal is our cheapest and dirtiest fuel used to produce electricity. Because it is so dirty, coal fired electric plants are now required to buy scrubbers to reduce emissions.

Natural gas has become cheaper to get out of the ground than coal, and produces electricity with less pollution.

Graph the market for coal. Put quantity of coal on the horizontal axis and price on the vertical axis.

Show and describe what happens to demand, supply, price and quantity demanded as a result of both scrubbers and lower gas prices.

The President says he will restore coal producing jobs. Discuss his likely success based on your graph of the coal market.

Answer 1

In the above figure,

The CASE (a) shows a market situation where there is no cheap substitute for making electricity and so coal has the market dominance and there high demand and supply of it.

The profits margin are good in this market scenario.

Also, there is no strictness from the government in terms of pollution emission so the cost of production has no such external pressures.

The CASE (b) shows a market scenario where now a cleaner and cheaper source of fuel is available in the market and hence a substitute good have entered the market.

So as per substitution effect the with the increase in demand and supply for natural gas the demand and supply for coal decreases. So the demand curve shifts to left whereas supply curve shifts upwards which give new equilibrium level where the quantity demanded is less and prices are set high.

Also, due to increasing awareness, the government has decided pollution norms that seek regulation of pollution by the coal industry by using scrubbers and hence this lead to an increase in coal pricing. (Complimentary good effect).

Is President claim True or false?

As mentioned above the coal has now a better substitute which is way cheaper and moreover environment-friendly.

The market for natural gas has lots of scope in the upcoming future. Industries have shifted towards using natural gas as a fuel to generate electricity as it is not only economical but also fulfils there social objective.

So the jobs can be restored in the coal industry for a short period of time if the government is ready to incur cost by themselves but cannot last for the long term. the demand for coal is shrinking in the global markets the world is moving towards its goal of sustainable development.