Exercise 2: Externality Policies Consider two oil reneries that both produce fuel, which has a market price of $3 per gallon. Assume that each renery 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 31 =y and 32 = Egg where yl and y2 denote the number of gallons of fuel produced at each plant, and 31 and 32 denote the amount of smog generated. Plant 2 pollutes only half as much as plant 1 for given production