14. (This problem is challenging.) The New York Times

(July 1, 1994) reported on a Clinton administration proposal to lift the ban on exporting oil from the North Slope of Alaska. According to the article, the administration said that “the chief effect of the ban has been to provide California refiners with crude oil cheaper than oil on the world market. . . . The ban created a subsidy for California refiners that had not been passed on to consumers.” Let’s use our analysis of firm behavior to analyze these claims.

a. Draw the cost curves for a California refiner and for a refiner in another part of the world. Assume that the California refiners have access to inexpensive Alaskan crude oil and that other refiners must buy more expensive crude oil from the Middle East.

b. All of the refiners produce gasoline for the world gasoline market, which has a single price. In the long-run equilibrium, will this price depend on the costs faced by California producers or the costs faced by other producers? Explain. (Hint: California cannot itself supply the entire world market.) Draw new graphs that illustrate the profits earned by a California refiner and another refiner.

c. In this model, is there a subsidy to California refiners? Is it passed on to consumers?