Uncertainty and the regional allocation of steam electric coal in the United States

This research uses a cost minimizing linear programming model to simulate the optimal allocation of United States steam electric coal. The coal sources consist of 23 coal producing districts and the demand regions are the contiguous states. The uncertainty of demand is incorporated by specifying a probability distribution of 1990 coal demand as derived from a two-stage econometric coal demand model. Over or under provision for future coal requirements is penalized through additional costs assessed within the linear programming model.

The results indicate that the optimal allocation of United States coal is noticeably affected by explicitly incorporating the cost of uncertainty in the model. Moreover, it appears that coal users pay a significantly higher price for coal as a result. However, this extra cost is not so great as to suggest that the flexibility of government policies, which increase uncertainty, necessarily should be abandoned.