Pollution abatement and partial privatization

This paper considers a mixed duopoly model where there are spillovers in environmental R&D. We adopt a three-stage game formulated by Haruna and Goel (2018) and investigate the impact of partial privatization on firm's investment in R&D and environmental taxes. We show that if the degree of privatization is relatively low and the spillover effect is significant, the private firm undertakes R&D and the government subsidizes emissions. Our model suggests that the government should never subsidize R&D when both firms invest in R&D. Furthermore, an increase in the degree of privatization is worse for the environment, but partial privatization increases social welfare.