Mixed Duopoly and Environment

We show under general demand and cost conditions that in a mixed duopoly with pollution the government can implement the socially optimal outputs and abatements by a tax‐subsidy scheme and keeping the public firm fully public. The scheme requires taxing outputs and subsidizing abatements at different rates, unlike a pollution tax. Our result improves on the shortcoming of a pollution tax to implement the social optimum. We also show that when the private firm is partly foreign‐owned, the government will adopt some privatization and will not implement the social optimum, though the social optimum is implementable.     

Privatization,Underpricing, and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit‐maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.