Environmental Tax, Trade, and Privatization

Abstract

The analysis presented in this paper explores the interaction among privatization, environmental, and trade policies. In particular, we consider the optimal environmental tax and tariff, and the effects of privatization of a public firm in international duopolistic markets with environmental damage. There are three main results. First, the optimal environmental tax is lower than the marginal environmental damage and the optimal tariff is strictly positive regardless of whether or not the home public firm is privatized. Second, privatization leads to the increase in the optimal environmental taxes and tariffs in both countries. Third, under the optimal environmental tax and tariff, privatization results in the reduction of social welfare and in environmental improvement.