Mixed Duopoly and Environment

We show under general demand and cost conditions that in a mixed duopoly with pollution the government can 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 different rates, unlike a pollution tax. Our result improves on the shortcoming of a pollution tax to implement the social optimum. 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.