Optimal Privatization Policy in a Mixed Eco-Industry in the Presence of Commitments on Abatement Technologies

We formulate the vertical market structure with a downstream polluting industry and an upstream eco-industry, where both private and public eco-firms produce abatement goods. We then investigate the voluntary commitments on target emissions from polluting firms and their impacts on the optimal decisions of privatization policies. We provide the conditions for the non-optimality of partial privatization and show that, depending on the environmental damage, full nationalization, full privatization or partial privatization can be optimal. In particular, it is shown that there is a U-shaped relationship between environmental damage and the optimal degree of privatization. It supports that government should have large ownership of privatized eco-firms for environmental protection when environmental damage is serious.