The Federal Government's efforts to induce development of a coal-based synthetic fuel industry include direct subsidies, tax concessions, and assurances that it will purchase the industry's output, even if above the market price. In this note it is argued that these subsidies will enable this industry to secure a region's largest and lowest-cost coal deposits and that the costs imposed on other coal users will be substantial. Moreover, because the lowest-cost coal deposits will be committed to synthetic fuels production regardless of the industry's commercial viability, distortions in regional coal markets will develop. If economic efficiency requires that the price of the resource reflect its replacement value, then a State government is justified in imposing a tax on coal destined for subsidized synthetic fuel plants. Amounts of such a tax, based on the higher costs of coal that must be accepted by other users as the result of the subsidized synthetic fuel plants' preempting the largest and lowest-cost deposits, are estimated for the case of Illinois strippable coal. ?? 1981 Annals of Regional Science.
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Some regional costs of a synthetic fuel industry: The case of illinois