General Equilibrium Implications of Privatization on Environment and Unemployment in Vertically Related Markets

Abstract

This paper is aimed at theoretically analyzing the environmental implications of privatization, adopted by many developing countries, using a three-sector general equilibrium model. The partially privatized firm owns a monopolistic position in upstream market and offers an essential intermediate input for downstream manufacturing sector. Both the privatized firm and manufacturing generate pollution that harms agricultural productivity. We obtain that the price elasticity of demand for manufacturing goods is crucial for determining the environmental impact of privatization. When the price elasticity is relatively small (large), deepening privatization raises (decreases) price of partial privatized firm and improves (deteriorates) the environment. We also show a paradoxical result that improving pollution abatement technology deteriorates the environment instead.