Environmental Tax and Public Ownership in Vertically Related Markets

This paper investigates the optimal rate of environmental tax and level of privatization in a vertical relationship between one partially privatized producer and two private sellers. The main results are as follows: First, privatization of the producer firm decreases environmental damage. Second, the optimal environmental tax rate equals the Pigouvian level. Third, fully nationalizing the producer firm is optimal when the government simultaneously decides upon the environmental tax rate; then, privatization decreases social welfare.