Should the Government Privatize Polluting Firms?

This paper presents an analysis of whether a central government should privatize a polluting firm in a region under circumstances in which transboundary pollution occurs. This paper’s characteristic feature is its consideration of circumstances under which the degree of influence that pollution emissions exert on the environment can be assessed on various levels. Theoretical studies of privatization and the environment in recent years include those of Beladi and Chao (2006), who regard a monopoly public firm as considering the consumers’ surplus and private profit when the firm chooses the output of a good. In contrast, in the analysis described herein, the public firm considers not only the consumers’ surplus and the private profit, but also the environmental damage that occurs when the firm chooses the output of the good. Beladi and Chao (2006) conclude that privatization will decrease the output of the good. In contrast, our analyses demonstrate that when the effect that emissions have on environmental damage is small (large), privatization will decrease (increase) the output of the good in the region. Based on results presented above, this paper presents a demonstration that when the effects that emissions have on environmental damage are large (small), then the optimal policy decision of the government is not (full) privatization. Moreover, when the effect is small, the optimal policy decision of the government is partial privatization