Market failure — practice question

Coal is burned directly to heat homes all over the world, and it generates more than 40% of the world’s electricity. Even so, the coal industry faces several difficulties. These include rising concerns about the environmental impact of coal use and greater competition from other fuels. Mining coal and using it to generate electricity creates air pollution. Coal-fired power stations release carbon dioxide, which has a damaging effect on people’s health. Wildlife habitats are harmed when new mines are opened and when coal waste is tipped on landfill sites. Even so, demand for coal has fallen recently. As a result, the price of a tonne of coal dropped from US$300 in 2010 to US$150 in 2015. In 2015, even China, the world’s biggest consumer of coal, bought less. Some high-cost deep mines were closed in the USA. In the same year, Europe’s largest producer, Poland, sold coal at a loss of US$37 a tonne. The decline in demand for coal is partly due to competition from renewable energy. For example, advances in technology are lowering the cost of generating energy from wind power. Fig. 1 shows how the wind power market changed in 2015. Fig. 1 The market for wind power in 2015 shows a vertical axis labelled “price of wind power” and a horizontal axis labelled “quantity of wind power”. The initial equilibrium price is labelled $P_1$ and the new equilibrium price is labelled $P_2$. The initial equilibrium quantity is labelled $Q_1$ and the new equilibrium quantity is labelled $Q_2$. A downward sloping demand curve is labelled $D_1$. Two upward sloping supply curves are shown, labelled $S_1$ (on the left) and $S_2$ (on the right).