Abstract
Resource shortages, environmental degradation, and pollution have forced businesses to change their business practices to become more sustainable. In addition, consumers increasingly demand eco-friendly products. This paper examines whether governments should privatize a company whose production process generates environmental pollution. We assume that the firm is in competition with a foreign private firm, that the firm invests in eco-friendly programs, and that consumers are environmentally aware. We find that: (a) Consumers' environmental awareness influences firms' decisions regarding production levels and environmental investments. (b) As the government increases the degree of privatization, the public firm decreases its eco-friendly level and the level of its production. In contrast, if the government deceases the level of privatization, the public firm increases its eco-friendly level and its level of production. The private firm subjected to change in the extent of privatization, both its eco-friendly level and the level of its production are determined by the magnitude of the consumer environmental awareness. (c) The optimal privatization policy that maximizes the social welfare is partial privatization.
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