Consider two oil refineries that both produce fuel, which has a market price of $3 per gallon. Assume that each refinery

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Consider Two Oil Refineries That Both Produce Fuel Which Has A Market Price Of 3 Per Gallon Assume That Each Refinery 1 (155.71 KiB) Viewed 26 times

Consider two oil refineries that both produce fuel, which has a market price of $3 per gallon. Assume that each refinery uses $2 in raw inputs (crude oil, electricity, labor) to produce 1 gallon of fuel. In addition, each plant produces smog, which creates $0.01 of environmental damage per cubic foot. The amount of smog per gallon of fuel produced differs at the two plants: $1 = y² where Y1 and Y2 denote the number of gallons of fuel produced at each plant, and $1 and S2 denote the amount of smog generated. Assume each plant can produce only up to 200 gallons. and S2 = 2²2 (a)(10 pts) Set up the problem for each plant, and determine production, pollution (smog) and damage when there is no policy (firm does not internalize externalities). (b) (10 pts) Set up the problem for each plant, and determine production, pollution (smog) and damage that maximizes welfare.