Analysis of the technological structure of refineries and blenders

Abstract

The Leontief multiproduct flexible cost function attempts to approximate the technology used by refineries and blenders. In general, this cost function satisfies the rational behavior restrictions imposed by economic theory. The estimated marginal costs are incorporated in a monopolistic competition model to calculate the virtual prices of the other products provided by the refineries and blenders under the hypothetical situation in which the reformulated gasoline is absent in the fuel markets. I have found that conventional gasoline and other product prices are greater than those of the mentioned hypothetical case. This result reflects the fact that consumers are being charged with high prices in order to have available a fuel which satisfies the environmental Protection Agency (EPA) regulations. Finally, when all the products become perfect substitutes, .,.ei the consumers are not interested in the environmental quality of the fuels, the price differences tend to be negligibly small.