As London prepares for Christmas, newspapers report the theft of the near priceless jewel, The "Blue Carbuncle", from the hotel suite of the Countess of Morcar. John Horner, a plumber and a previously convicted felon, is soon arrested for the theft. Though the police have yet to find the jewel, and despite Horner's claims of innocence, the police are sure that they have the thief. Horner's record, and his presence in the Countess's room where he was repairing a fireplace, are all the police need.
Just after Christmas, Watson pays a visit to Holmes at 221B Baker Street. He finds the detective contemplating a battered old hat, one brought to him by the commissionaire Peterson. Both the hat and a Christmas goose had been dropped by a man in a scuffle with some street ruffians. Peterson, an honest man, had hoped for Holmes' help in returning the items to their owner but although the goose bears a tag with the owner's name - Henry Baker - Holmes had little hope of finding the man. Peterson took the goose home for dinner and Holmes kept the hat, to study as an intellectual exercise.
While Watson is there, Peterson returns excited, carrying the Blue Carbuncle, claiming that the carbuncle was found in the found goose's crop (throat). Realizing that the identity of Henry Baker is now part of a larger mystery, Holmes makes a concerted effort to identify Baker. Based on his observations of the hat and its condition, Holmes makes several deductions as to Baker's age, social standing, intellect and domestic status, but cannot determine if Baker knew that he was carrying a priceless gem. When Baker appears at 221B Baker St. in response to advertisements Holmes had placed in London's newspapers, Holmes' deductions prove correct. Holmes gives Baker a new goose, explaining that the old one had been consumed. Baker, happily accepting the replacement bird, declines to cart away his original bird's entrails (Disjecta membra), convincing Holmes that Baker knew nothing about the missing jewel. Baker does, however, give Holmes the valuable information that he had purchased the goose at the Alpha Inn, a pub near the British Museum.
Holmes cannot resist such an intriguing mystery, and he and Watson set out across the city to determine how the jewel traveled from the room of the Countess of Morcar to a goose's crop. The proprietor of the Alpha Inn informs them that the goose was purchased from a dealer in Convent Garden. At Covent Garden, a salesman named Breckinridge gets angry with Holmes and refuses to help. The merchant complains of pestering he has endured about geese sold recently to the landlord of the Alpha Inn. Holmes, realizing that he is not the only one aware of the carbuncle's connection to Baker's goose, tricks an irate Breckenridge into revealing that the bird was supplied by a Mrs. Oakshott, a poultry and egg purveyor in Brixton.
James Ryder imploring Holmes' mercy
A trip to Brixton proves unnecessary when Breckenridge's other "pesterer" - a cringing little man named James Ryder, head attendant at the hotel where the carbuncle was stolen - appears, again pressuring Breckenridge to tell him the whereabouts of the Oakshott geese. Holmes and Watson invite Ryder back to 221B Baker Street, telling Ryder that they know he is looking for a goose with a black bar on its tail.
Holmes tells Ryder that the goose "laid an egg after it was dead". Ryder is terrified when he realizes that Holmes will turn him over to the police. Pressured by Holmes, Ryder recounts that he and his accomplice Catherine Cusack, the Countess's maid, contrived to frame Horner, knowing that Horner's past would make him an easy scapegoat. But he was plagued by fears of arrest after stealing the stone. During a visit to his sister - Mrs. Oakshott - Ryder hit on the idea of hiding the jewel by feeding it to one of the geese being bred by his sister, one of which had been promised to him as a gift. Unfortunately, Ryder dropped his bird and then confused it with another, taking away the wrong goose. By the time Ryder realized his mistake, the other geese had already been sold. Ryder tried to follow the trail but got no further than Breckenridge.
Being Christmas, Holmes does not have Ryder arrested. He concludes that arresting the clearly anguished Ryder will only make him into a more hardened criminal later. Ryder flees to the continent and Horner will be freed as the case against him will collapse without Ryder's perjured testimony. Holmes remarks that he is not retained by the police to remedy their deficiencies.