Privatization and the Environment

We investigate the privatization policy of an industry where the production process generates emissions. We show that the high degree of negative externality leads to production substitution from the public firm to private firms. Moreover, we show that, if the degree of negative externality is sufficiently high, then a mixed oligopoly is preferable to a pure oligopoly for social welfare, even if the number of firms in the market is large. Furthermore, we consider free entry of private firms.