The Coal Market: Pollution, Pigouvian taxes and permits

An experiment from the book Experiments with Economic Principles by Theodore C. Bergstrom, Marcus Giamattei, Humberto Llavador and John H. Miller

Material for Students

Winter nights get cold on the Isle of Effluvia. With heavy blankets, one can get along without heat, but a warm fire is much appreciated, especially by those whose houses are not well insulated. The surrounding seas are turbulent, the coastal shores are treacherous, and no trading boats can bring fuel. Solar panels and green technology have not reached Effluvia. The only available fuel is locally-mined coal, which Effluvians burn in old coal stoves. Heating a house requires 1 unit of coal. Coal stoves pollute the air, emitting soot particles that penetrate deep into the lungs of all Effluvians.

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