Incomplete Regulation in an Imperfectly Competitive Market: The Impact of the Renewable Fuel Standard on U.S. Oil Refineries

I estimate how unexpected increases in the costs of the Renewable Fuel Standard (RFS), a marketbased policy, affected U.S. oil refinery prices, markups, marginal costs, and production decisions. The results highlight the risks of failing to account for imperfect competition, multi-product firms, or both when creating policies. First, increases in the costs of the RFS were more than fully passed through to gasoline prices, causing an increase in gasoline markups. Refineries also responded by reallocating production to non-regulated fuels, which led to emissions leakage. Finally, gasoline consumers bore 94% of the burden of the unexpected cost increases.