In micro principles we teach that when price falls below average variable cost (e.g., labor and materials) the firm will shut down (Coal’s Decline Seems Impervious to Trump’s Promises):
The decline in demand has forced a 38 percent drop in the nation’s coal production in a little less than a decade. Now only the most efficient mines containing the highest-quality coal are able to survive.
The 4 West mine, like many that produce coal for power utilities in Appalachia, is expensive to run. Its coal seam is thin and of lower quality than competing mines, and its traditional form of mining requires costly methods to stabilize roofs to protect against the kind of accidents that caused the deaths of two miners at 4 West over the last three years. Government fines and management turmoil also took their toll.
The most successful mines these days, particularly here in Appalachia, produce metallurgical coal for steel making in the United States and abroad. 4 West produces only thermal coal for a nearby power plant, which will now rely on other local mines.
“It’s just come to a point where the mine is not economical to continue,” said Brian Osborn, senior vice president for operations for Mepco Holdings, owner of the 4 West mine.
The trick to saving coal jobs is to keep the price high. Increasing the demand for coal was the underlying rationale of the attempt made by the Department of Energy recently, which was rejected by FERC.
