Environmental R&D subsidy, spillovers and privatization in a mixed duopoly

Abstract

The study considers an environmental R&D subsidy in a mixed duopoly with spillovers. Public and private firms compete in environmental R&D investments and the government sets the subsidy to environmental R&D. This study examines three cases: (a) the public firm cares for the environment and maximises the welfare; (b) it does not care for the environment and maximises the sum of consumer and producer surpluses net of subsidy; and (c) it is privatised and maximises its own profit. The main findings are as follows: 1) the optimal subsidies are positive in all three cases; 2) the optimal subsidy always increases with spillovers in case (a), but it may decrease with spillovers in cases (b) and (c); 3) the optimal subsidy is higher in case (a) than in case (b) if the seriousness of environmental damage generated by pollution is small, however the opposite case may be the case if it is large; 4) the use of subsidy results in higher total R&D and lower environmental damage in all three cases; 5) privatisation lowers optimal subsidy (or environmental damage) no matter whether the public firm cares for the environment or not; and 6) privatisation reduces welfare if the public firm cares for the environment, but may raise welfare if it does not care for the environment.

Environmental R&D and privatization in a mixed duopoly market

“…It follows that the public firm decreases its ER&D because of the strategic substitution. Note that, we got a similar conclusion when analyzing the impact of the ER&D subsidy on the public firm's ER&D, and also found that the ER&D subsidy has only an indirect effect on the public firm's ER&D behavior through the private firm's ER&D (Xing et al, ). Proposition In the mixed duopoly, (i) when the public firm cares much about environment, only if t is sufficiently large, and the opposite appears if t is not very large; (ii) when the public firm does not care much about environment, only if t is sufficiently small, and the opposite appears if t is not very small.…”

“…The intuition is as follows. An increase in X ( x 0 or x 1 ) leads to a decrease in the public firm's effective marginal cost (i.e., a reduction in C ' ( q 0 )+ kD ' ( Q − X )), so that it has higher incentive to produce, whereas the private firm reduces output because of the strategic substitution (Xing et al, )…”

“…However, the public firm always underinvests in ER&D if it does not care much for environment (see Figure ). In this situation, we should take into account other policy instruments to correct market failure in ER&D (e.g., the ER&D subsidies) (Xing et al, ).…”

“…See Gil‐Moltó, Poyago‐Theotoky, and Zikos (), Andree (), Nie (), Naya () and Xing, Tan, and Wang ().…”

“…That is, a public firm does not necessarily pursue the maximization of social welfare as the government does (See Ohori (), Wang and Wang (), Kato (), Pal and Saha () and Xing et al ().…”