The Demand for Synthetic Fuels:   Contingent Valuation of Quality-Differentiated Factors of Production*

J. B. Braden,   C. D. Kolstad,   R. A. Woock,   and   J. A. Machado**

Revised:   May 1997

ABSTRACT

The paper concerns measuring the demand for a "synthetic" fuel--desulfurized coal--using contingent valuation techniques. This represents one of the first times this method has been applied to factors of production. A complicating factor is that the synthetic fuel can be of various qualities. The empirical results illustrate the difficulty of configuring synthetic fuels to meet the requirements of existing generating plants. The contributions of the paper are in extending contingent valuation to quality-differentiated factor demand, using robust estimation techniques to reduce the influence of outliers, and estimating the returns to investment in coal desulfurization.

*   Major support for this research came from the Illinois Center for Research on Sulfur in Coal (Project No. 1-5-90314). Additional support was provided by the Agricultural Experiment Station, University of Illinois (Project No. 334). The staff of the Center, researchers at the Illinois Geological Survey, Alan Randall, Kerry Smith, and Rich Bishop all provided very helpful suggestions. Roger Koenker graciously advised us on estimation procedures. The survey could not have been completed without the cooperation and good humor of many electric utility coal purchasing officials. Of course, the authors alone are responsible for the paper's contents.

**   Department of Agricultural and Consumer Economics and Water Resources Center, University of Illinois at Urbana-Champaign; Department of Economics and School of Environmental Science and Management, University of California, Santa Barbara;US WEST Advanced Technologies, Boulder, CO; Faculty of Economics, New University of Lisbon, Portugal.

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