Sonic 2 the Master System takes place on South Island, the same Island as Sonic 1!

[SpongeSonicGuy(?)]

If you look real closely in the intro of the game, you'll see that it's in GREEN HILL.

 

[glaber]

One of the zones is Green Hills, so it makes sense.

 

[SpongeSonicGuy(?)]

One of the zones is Green Hills, so it makes sense.

If you see the Remake by Creative Araya, the unused zone returns (and REPLACES Green Hills, and the boss, Mecha Pig, is now in Crystal Egg).