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Environmental Pollution in a Mixed Oligopoly

Student: Naumova Maria

Supervisor: Alla Fridman

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Year of Graduation: 2016

This work studies a mixed duopolistic market where production is associated with environmental damage. As no one in related studies did before, we account for consumers’ willingness to pay a price premium for goods produced by the firm that invests in pollution reduction. This premium is proportional to the amount of emissions abated by the firm and depends positively on the degree of consumers’ environmental concern. Firms’ abatement efforts in our model act as an endogenous mechanism of absolute product differentiation and the equilibrium analysis shows that the efficiency of this mechanism depends on firms’ market shares and the degree of consumers’ environmental concern. The two competing firms differ in their objectives. One is fully private and aims at profit maximization. The other is a partially privatized government firm that seeks to maximize a weighted average between its private profit and social welfare. The weights with which the two components enter the mixed firm’s objective function depend on the degree of its partial privatization. This degree is set by the welfare-maximizing government before firms make their optimal choices. The model subgame perfect Nash equilibrium is the result of agents’ multistage decision-making process. We show that the level of consumers’ concern for ecological problems influences the relationship between Environmental Damage and the degree of partial privatization. This influence is similar to the one that the government environmental regulation has in models of mixed markets studied in previous works. Besides, the model equilibrium suggests that the overall agents’ welfare grows with the degree of consumers’ environmental concern. Further, we derive an inverted U-shaped relationship between the social welfare-maximizing degree of partial privatization and consumers’ concern for environment. The research reveals that partial privatization enhances the social welfare.

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