Commodity Modeling and Pricing: Methods for Analyzing Resource Market Behavior

CHAPTER 10

Pollution Taxes and Price Control in the U.S. Coal Market A Rent Minimization Model

Chin W. Yang and Ming-Jeng Hwang

INTRODUCTION

Coal plays an important role in the national U.S. energy household. However, one of the disadvantages of coal, as of all fossil fuels, is that it has a high social cost that is born in the form of pollution. Past studies have explored this issue, including how to alleviate the problem through pollution taxes. What we are contributing that is new is the spatial analysis of pollution taxes.

Spatial equilibrium models date back to the classical linear programming model pioneered by Hitchcock (1941), Kantorovich (1942), and Koopmans (1949). Enke (1951) extended the transportation model through appeal to analogies to Kirchhoff’s law of electrical circuits, and introduced price and regional transportation demand and supply. The common origins of the market-oriented spatial equilibrium models are generally traced back to the influential work of Samuelson (1952), in which price differentials between demand and supply regions must be less than or equal to the corresponding transportation cost.

Takayama and Judge (1964) reformulated Samuelson’s approach into a standard quadratic programming model and created an operationally efficient and conceptually convenient model that spawned numerous empirical applications and theoretical extensions. They include a new algorithm (Liew and Shim 1978), sensitivity analysis (Irwin and Yang 1981), and extensions ...