Environmental taxes under mixed duopoly: The roles of privatization and foreign eco-technology

Abstract

Governments usually impose environmental taxes to control pollution. This research theoretically investigates the welfare effect of privatization when a public firm and a private firm buy an abatement technology from a foreign eco-technology innovator in response to an environmental tax levied by the domestic government. Our results show if the environmental tax rate is sufficiently low (high), then privatization can lead to a lower (higher) eco-technology price, and thus privatization is desirable (undesirable) for social welfare. Moreover, while privatization clearly increases profits for both firms, it reduces consumer surplus and environmental tax revenue. Before privatization, higher environmental tax rates do not necessarily reduce total emissions. After privatization, higher environmental tax rates always reduce total emissions. We also find that privatization decreases total industry emissions when the harmfulness of emissions is low. However, when the harmfulness of emissions is high, the relationship between changes in total industry emissions after privatization and the environmental tax rate is not monotonic.