Environmental outcomes in a model of mixed duopoly

We show under general demand and cost conditions that in a mixed duopoly with pollution the government will implement the socially optimal outputs and abatements by a tax-subsidy scheme and keeping the public firm fully public. The scheme requires taxing outputs and subsidizing abatements at diff erent rates, unlike a pollution tax. Our result contradicts some of the recent claims that social optimum is not implementable and privatization is necessary. We also show that when the private firm is partly foreign-owned, the government will adopt some privatization and will not implement the social optimum, though the social optimum is implementable.