民營化、外資持有、環境與貿易政策

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(1)國立高雄大學應用經濟學系碩士論文. 民營化、外資持有、環境與貿易政策 Privatization, Foreign Ownership, Environmental and Trade Policies. 研究生：郭哲維撰指導教授：王鳳生博士. 中華民國一百年七月.

(2) 致謝大學畢業離開生活二十二年的台中來到高雄唸書，兩年的研究所生活也要結束了。感謝我的指導老師王鳳生教授對我的諄諄教誨，指導我在論文上能有明確的方向，在老師耐心的指導下我才能順利完成論文。還有辛苦的口試委員佘志民老師、李仁耀老師給予我論文上寶貴的建議，使我的論文更加完善。以及我的夥伴舜欽、俊銘，總在我寫論文遇到障礙的時候跟我一起討論解決的方法。還有珮瑜姐這一年來協助我們處理論文還有研討會有關的事給我們很大的幫助。感謝柯秀欣老師給我擔任總經助教的機會，還有辛苦的姿孙姐。謝謝彥儒、趙哥這兩年來的照顧，還有我碩士班最好的朋友政源。還要謝謝我在高雄的大學同學們，在課業之餘約我出去玩樂。謝謝所有關心我的朋友們和曾經幫助過我的人，我順利畢業了！最後當然最感謝我的父母，謝謝你們栽培我到研究所畢業，我一定會盡我所能的孝順你們，努力成為你們的驕傲。. 郭哲維謹誌於國立高雄大學中華民國一百年仲夏.

(3) 民營化、外資持有、環境與貿易政策指導教授：王鳳生博士國立高雄大學應用經濟系. 學生：郭哲維國立高雄大學應用經濟系. 摘要. 近年來，環境議題逐漸被重視，隨著世界經濟的全球化，我們考慮寡佔市場開放政策工具: 民營化、貿易自由化和外資持有及與其搭配環境政策對國內產出、利潤、社會福利及環境的影響。首先在一個單一市場存在一家民營化公營廠商和一家民營廠商允許外國持有並生產同質產品。隨著開放外資持有，公營廠商應下降民營化程度。當外資持有比例越高，伴隨著更高標準的環境政策，環境會得以改善但傷及社會福利。其次討論在混寡市場下廠商生產異質產品，考慮政府實行不同的環境政策。當產品差異化程度越高，對環境造成的傷害都越大。但隨著產品差異化的高低，不同的環境政策，最適的民營化程度也有高低之分。再者假設國內兩家民營廠商國外一家廠商出口到本國並在國內市場競爭，考慮貿易自由化且產品有消費性汙染時，我們分析開放外資持有對於國內環境惡化或改善以及貿易自由化的影響。當開放國內市場，關稅下降對環境有正面影響。而國內企業開放外資持有，隨著更高標準的環境政策，國內環境也將獲得改善。. 關鍵字：民營化、環境政策、外資持有、貿易自由化. I.

(4) Privatization, Foreign Ownership, Environmental and Trade Policies Advisor: Dr. Leonard F.S. Wang Department of Applied Economics National University of Kaohsiung Student: KUO, CHE-WEI Department of Applied Economics National University of Kaohsiung. ABSTRACT. In recent years, the public became more concerning about the environmental issues. In this thesis, we focus on the effects of market-opening policies in an oligopolistic competition: How will privatization, trade liberalization and foreign ownership coupled with environmental policy affect domestic output, profit, social welfare and environment. Firstly, we consider a model with one semipublic firm and one multinational firm producing homogeneous good. We show that along with an increasing degree of foreign ownership by multinational firms, the government should decrease the degree of privatization. Furthermore, if the restriction on foreign ownership is relaxed, and coupled with the higher standards of environmental policy, the environment will be improved but the social welfare deteriorates. Secondly, we consider a domestic mixed duopoly market where there exists one public firm and one domestic private firm producing a differentiated good. When the partial privatization of a public firm is considered, the government can set two different types of environmental policies: emission tax and emission quota. It shows II.

(5) that when the product is highly differentiated, the environment is more damaged. In addition, the optimal level of privatization is different with the degree of product differentiation under two types of environmental policies. Finally, we consider a trade model in which there are two private firms and one private foreign firm competing in a domestic country with consumption externalities. We analyze whether foreign ownership improves or deteriorates the environment and social welfare, and the effects of trade liberalization. We show that the tariff reduction brings positive effect on the environment. When the domestic private firms are open for foreign ownership, the stringent environmental policy improves the environment.. Keywords: Privatization, Environmental Policy, Foreign Ownership, Trade Liberalization. III.

(6) CONTENTS CHAPTER ONE: AN INTRODUCTION 1.1 Research Background…………………………………………………………1 1.2 Literature Review………………………….……………………………………..2. CHAPTER TWO: Partial Privatization, Foreign Ownership, and Environmental Policy 2.1 Basic Model…………………………….……………………..…………………6 2.2 Optimal level of privatization…………………..…………………………….9 2.3 Comparison of the output…………………………………………….…………10 2.4 Foreign ownership on environment and social welfare……………..…………11 2.5 Special Case………………………………………………………………….12 2.6 Conclusion………………..………………………………………………………13. CHAPTER THREE: Partial Privatization and Environmental Policies in a Differentiated Mixed Duopoly 3.1 Basic Model…………………………….………..…………………………….14 3.2 Emission tax…………………….………………….……………………..15 3.3 Emission quota…………….…………………………………………………..17 3.4 The environment under emission tax and emission quota……………………19 3.5 Optimal level of privatization……………………………………………….20 3.6 Product differentiation on environment and social welfare under emission quota…….……………………………………………………………...………21 3.7 Conclusion……………………………………………….……………………..21. CHAPTER FOUR: Trade Liberalization, Foreign Ownership and Environmental Tax with Consumption Externalities 4.1 Basic Model…………………………………………………….……………22 IV.

(7) 4.2.1 Case 1: One domestic firm allowed to foreign ownership……………….….23 4.2.2 Case 2: All domestic firms allowed to foreign ownership…………………26 4.2.3 Special Case…………………………………………………………….……..28 4.3 Comparisons of the output under different cases…………………..…………29 4.4 Foreign ownership on environment and social welfare…………….……30 4.5 Trade Liberalization on Environment………….……...……….………….……31 4.6 Conclusion……….………………………….…………….………....……….….32. CHAPTER FIVE: CONCLUSIONS. V.

(8) CHAPTER ONE: INTRODUCTION 1.1 Research Background After economic growth over the last decade or so, with the climate change and Greenhouse effect, public paid more and more attention back to care of environmental issues. In many developing countries like European countries, government set environmental policies to improve the environment. In order to regulate the environment, environmental policy is usually divided into direct control or indirect control. The government sets pollution standards or imposes environmental taxes to control pollution. Environmental policies in a mixed oligopoly have been analyzed in recent years. Due to attention of social welfare, production of the public firm tends to be inefficient. Therefore, through privatization, the objective function facing by public firm shift the proportion of social welfare to profit maximization, which can lead to more efficient production. In recent decades, in order to improve production efficiency and economic growth, many countries have engaged in privatization policy. The affect of privatization on the environment has become the popular issue. In pace with the globalization of the world economy continued over the last decade, we can see a lot of the phenomenon of multinational investment. Foreign entry into a market there are typically three modes: foreign direct investment i.e., setting up a firm in the host country to compete with domestic industry, exports and foreign ownership by multinational enterprises. In the case of foreign ownership, a foreign firm could entry into other country's market by purchasing equity share of local domestic firm so that to be foreign stockholder. With an increase in the phenomenon of multinational enterprises, governments have imposed market-opening policies, set the level of foreign 1.

(9) ownership. In order to enhance the competitive power of domestic industry, government tries to open economy to attract foreign entry. But it may deterioration of the domestic environment. With the open economy and public awareness of the environment. While the government choose to trade liberalization, on the other hand the implementation of environmental policies. In an open economy, the impact of trade liberalization on the environment has become the focus of much attention and debate. How the Government to strike a balance between economy and environment, it’s become an important issue.. 1.2 Literature Review The literature on the environmental issue, Simpson (1995) derived the optimal pollution for a Cournot duopoly and found that if firms have different production costs, the optimal tax rate may exceed the marginal damage. There are many literature has been discussed environmental policy in mixed oligopoly. Bárcena-Ruiz and Garzón (2006) explored how the decision on whether to privatize a public firm or not with environmental policy, and showed that when the government sets a tax to protect the environment, the tax is lower in a mixed oligopoly than in a private one, and that the environmental damage is greater. In recent years many studies focused on the privatization issue and related environmental policy. Beladi and Chao (2006) discussion the case of a monopoly partially privatized firm generates pollution emissions. It shows that privatization can have a negative effect on the environment. Due to profit maximization directly lowers output but the reduced tax rate gives a positive effect on output. So that privatization may harms the environment. Wang et al. (2009) examine whether privatization improves the environment in a mixed duopolistic model when both firms adopt 2.

(10) pollution abatement technologies in response to the environmental tax imposed by the government. It is shown that privatization does improve the environment. Moreover, by implementing partial-privatization policy, social welfare can be enhanced. However, the impact of privatization on environmental in a differentiated product framework has received little attention in the literature. Wang and Wang (2009) examines whether privatization improves the environment in a mixed duopolistic framework with differentiated product and pollution abatement. It is shown that, due to privatization, less attention is paid to pollution abatement by all the firms coupled with less environment taxes levied by the government, and the environment is more damaged when the product is less substitutable. When the product is highly substitutable, social welfare deteriorates accompanied with the privatization. Furthermore, Pal and Saha (2010) explored dose partial privatization improve the environment, in case of differentiated products mixed duopoly. It is shown that environmental damage increases (decreases) with the level of privatization, if the level of privatization is less (more) than certain level. Different types of environmental regulations in a mixed oligopoly have been analyzed in recent years. Kato (2010) compared emission taxes and emission quotas in a mixed and pure duopoly. This study considers a direct regulation: an emission quota that the regulator sets for each firm uniformly or differentially. It shows that in a mixed duopoly, a differentiated emission quota does more to improve welfare than an emission tax. In a comparison of the emission tax with a uniform emission quota, the superiority of environmental regulations in terms of social welfare depends on the parameters of the cost functions. Kato (2010) compares emission tax and emission quota in a mixed duopoly when the partial privatization of a public firm is allowed. Furthermore, consider the objective of the public firm maximizes the weighted average of its profit and the sum of consumer surplus and producer surplus. It shows 3.

(11) that the emission quota is welfare superior to the emission tax when the degree of partial privatization is high. Few studies have considered foreign ownership, privatization, and environmental policies. Wang and Chen (2011) examine the impact of foreign penetration on privatization in a mixed oligopolistic market. It showed that government should increase the degree of privatization along with an increasing proportion of domestic stockholding of multinational firms. Furthermore, an increase in domestic ownership of multinational firms raises all domestic private firms' profit and social welfare. Ohori (2011) investigates the effects of foreign ownership of a domestic firm on the establishment of environmental policy under an oligopolistic market. Find that foreign ownership restriction leads to low environmental tax rates and an increase in welfare. In an open economy with consumption externalities, Lai (2004) examined trade and environmental policies in a pure duopoly market, and demonstrated a tariff reduction in the home country will reduce the pollution damage associated with consumption externalities. Ohori (2006) extended Lai’s work in a mixed duopoly model wherein environmental damage is associated with consumption and showed that the optimal environmental tax in a mixed duopoly is higher than the optimal tax in a pure duopoly. Besides, trade liberalization does not alter the environment. Wang et al. (2007) investigated the optimal environmental tax and the environmental effect of trade liberalization in a mixed oligopoly and pure oligopoly, wherein firms produce the differentiated goods and the environmental damage is associated with consumption. It demonstrated that when the domestic market increases its openings, the tariff reduction does not always bring positive effects on the environment in mixed oligopoly; but, in pure oligopoly with homogeneous goods, the tariff reduction is bad for the environment. Chao and Yu (2007) examined the effects of trade liberalization on firm ownership and the environment. It is found that tariff reduction 4.

(12) can result in a switch in firm ownership from domestic to foreign, coupled with a lower pollution tax.. 5.

(13) CHAPTER TWO: Partial Privatization, Foreign Ownership, and Environmental Policy This chapter examines the impact of foreign ownership on privatization in a mixed oligopolistic market. We assume that a pollutant is associated with the production of the good. The government sets the environmental tax to control the pollution. We examine whether foreign ownership improves or deteriorates the environment and social welfare in a mixed duopolistic framework. We also analyze the interaction of two market-opening policies: privatization and open of foreign ownership restriction.. 2.1 Basic Model The economy made up of one semipublic firm (indexed by 0) and one multinational firm (indexed by 1) producing homogeneous good. The inverse demand function is given by p  A  Q , where Q  q0  q1 is the total output of the market. Accordingly, total consumer surplus is CS  Q2 / 2 . The cost function of semipublic firm is c  q0   multinational firm is c  q1   . q02 and the cost function of 2. q12 , where   [0, 1] represents the degree of domestic 2. ownership of the multinational firm. When α=1, foreign ownership are not allowed so that the private firm in the market is owned by domestic stockholders. When α=0, it corresponds to the case of full foreign ownership. We assume that the investment by foreign investors into multinational firm makes to more efficient production technology relative to semipublic firm. Which is means that as the proportion of multinational firm’s share held by foreign ownership increases, the production cost of multinational firm decrease. 6.

(14) We assume that a pollutant is associated with the production of the good and each unit of good produced gives rise to one unit of pollution. Pollution by production is ei  qi .The environmental damage is ED  dQ , where d is the coefficient of the marginal environmental damage. The government sets the environmental tax t to control the pollution. Tax revenues collected by the government are T  tQ . The semipublic firm’s profit is defined by: q02  0   A  q0  q1  t  q0  2. (2.1). The multinational firm’s profit is defined by:.  1   A  q0  q1  t  q1  . q12 2. (2.2). As in Beladi and Chao (2006), the semipublic firm’s objective function can be considered as the weighted average of its own profit and the sum of consumer surplus and producer surplus. The objection of the semipublic firm is given by:. V   0  (1   )(CS   0  1 ) where   [0,1] is interpreted to represent the degree of privatization. It indicates that the larger the value of  , the more the private ownership. When   0 , it is completely public-owned, and when   1 , it is fully private-owned. Social welfare which is comprises the consumer surplus CS, the producer surplus  0  1 , and the tax revenues collected by the government T, less the environmental damage ED. Thus, the social welfare can be expressed as. W  CS   0  1  T  ED. (2.3). It is assumed that foreign ownership transfers the profit of the multinational from domestic country to the foreign country. Then the domestic welfare is not related to 7.

(15) the profit of the proportion of foreign holdings. The sequence of the three stage game is described as follows: The government maximizes social welfare to choose the optimal degree of privatization, θ, in the first stage. In the second stage, the government sets the environmental tax to maximize its social welfare. In the third stage, each firm simultaneously maximizes its objective function, V for the privatized public firm and π for private firm, to choose its quantity. We solved by using the backward induction method to get a Sub-game Perfect Nash equilibrium (SPNE). In third stage of the game, the first-order conditions are given by V  A  t  (2   )q0  q1  0 q0  1  A  t  q0  (2   )q1  0 q1. (2.4). From the above first-order conditions, we obtain the results. q0 . ( A  t )(1   ) ( A  t )(1   ) , q1  3  2   (2   ) 3  2   (2   ). (2.5). and. dq0 ( A  t )(1   )(2   ) dq1 ( A  t )(1   )  0 ,  0 2 d (3  2   (2   )) d (3  2   (2   )) 2 It implies that increase the degree of private ownership of the public firm. The public firm's output decrease, and increase multinational firm’s output. In the second stage, the government sets environmental tax to maximize the social welfare. We substitute (2.5) into social welfare thus social welfare is given by: SW . ( A  t )(2d (2     )(3  2   (2   ))  A(1   )(1   )(5     (3   ))  t (7  2 (3   )   (8  3 )   2 ( (2   )  1))) 2(3  2   (2   ))2. Differentiating it with respect to t, we obtain the optimal environmental tax. 8.

(16) t. A( 2    1  ( (4  3 )  1)  ( 2    1) 2 )  d (2     )(3  2   (2   )) (2.6)  2 ( (2   )  1)   (8  3 )  2 (3   )  7. In the first stage, social welfare is obtained by substituting t (θ) and qi (θ) in the expression of SW. Solving this problem we get the social welfare maximizing level of privatization as follows: 1  2 2 2. * . We then substitute  * back to t (θ), qi (θ), and get the SPNE outcomes as follows: t* . d (4     2 )  A(1     2 ) 5  2 2. q0* . ( A  d )(2   2 ) (A  d) , q1*  2 5  2 5  2 2.  0* . ( A  d )2  (2   )(2   2 ) ( A  d )2 (2   ) * ,   1 2(5  2 2 )2 2(5  2 2 )2. CS * . ( A  d )2 (3   2 )2 2(5  2 2 )2. SW * . ( A  d ) 2 (3   2 ) 10  4 2. ED* . d ( A  d )(3   2 ) 5  2 2. 2.2 Optimal level of privatization We now want to consider the impact of change in foreign ownership on optimal level of privatization. We derive the total impact of foreign ownership on the degree of privatization by differentiating the optimal level of privatization with respect to  d * 2   (2   )  0 d (2   2 )2. An increasing proportion of domestic stockholding of the multinational firm prompts a higher degree of privatization for public firm. This result which is the same as Wang and Chen (2011) obtain in a mixed oligopolistic market without considers 9.

(17) environmental damage.  1.0 0.8 0.6 0.4 0.2. 0.2. 0.4. 0.6. 0.8. 1.0. . 0.2 0.4. When   0.618 , then   0 , semipublic firm is fully public-owned. When   1 , then   1 , the market changes private duopoly. There are two domestic private firms in the domestic market without foreign ownership. When government choose release foreign ownership restriction. With the loss of producer surplus that foreign investor transfers from domestic to the foreign country. Due to the deterioration of domestic social welfare, government should tighten the privatization policy. Increasing proportion of public-owned on public firm to paid more attention to domestic social welfare. Proposition 1. Along with an increasing proportion of foreign stockholding of the multinational firm, government should decrease the degree of privatization.. 2.3 Comparison of the output q0  q1 . ( A  d )(1   2 ) 0 5  2 2. dq0* dq1* 4( A  d ) 2( A  d ) ,   0  0 d (5  2 2 )2 d (5  2 2 )2. The public firm's output is greater than multinational firm's output. With increasing proportion of domestic stockholding of multinational firm, as 10.

(18) increase the degree of privatization, public firm decrease its output, the output gap between public firm and multinational firm become smaller. When   1 , then q0  q1 . Due to the market structure change private duopoly, the public firm's output equal to the multinational firm's output. dQ* 2( A  d ) = 0 d (5  2 2 )2. When increase in foreign stockholding of multinational firm. With foreign ownership transfers the profit of the multinational from the domestic country to the foreign country. The profit shifting effect will result in decline of domestic output. Proposition 2. With increasing proportion of domestic stockholding of multinational firm, the output gap between public firm and multinational firm become smaller.. 2.4 Foreign ownership on environment and social welfare Taking the partial differentiation of t with respect to  , we have dt * ( A  d )(5  2 (3   ))  0 d (5  2 2 )2. It indicates that when the domestic stockholding of multinational firm is reduced, foreign investors transfers the profit from the domestic country to the foreign country, but the pollution stay in domestic country. The government should raise the environment tax to maintain the domestic environment. Proposition 3. With increasing proportion of foreign stockholding of multinational firm, government should raise the environment tax to maintain the domestic environment.. d  0* d  1* 0 , 0 d d 11.

(19) dCS * 2( A  d )2  (3   2 )  0 d (5  2 2 )3 dSW *  ( A  d )2  0 d (5  2 2 )2 dED* 2( A  d )d  0 d (5  2 2 )2. An increase in domestic stockholding of multinational firm increases all firms' profit, the profit of the multinational firm stay in home country, which increases social welfare as well. If increase in foreign stockholding of multinational firm. Due to the decrease of output, consumer surplus will decline. When increase in foreign stockholding of multinational firm. We obtained by the previous results, government impose a higher environmental tax. The domestic environment has improved. But social welfare deteriorates because the loss of consumer surplus and foreign ownership transfers the profit of the multinational from the domestic country to the foreign country, even if the environment is less damaged. Proposition 4. An increase in foreign stockholding of multinational firm decrease all firms' profit, total consumer surplus and social welfare, however it may improve of the domestic environment.. 2.5 Special Case We consider the case that investment by foreign investors into the multinational firm does not affect production technology. We get the following SPNE outcomes as follows:. * . 2  3 3  4. t* . 2 A  7d  3 A  3d 9  6. q0* . ( A  d )(4  3 ) (A  d) , q1*  9  6 9  6. 12.

(20)  0* . ( A  d )2  (4  3 ) ( A  d )2 * ,   1 6(3  2 )2 6(3  2 )2. CS * . ( A  d )2 (5  3 )2 18(3  2 )2. SW * . ( A  d )2 (5  3 ) 6(3  2 ). ED* . d ( A  d )(5  3 ) 9  6. Compare to the former case, due to the higher production cost decrease the total output. In this case domestic social welfare decrease but the environment is less damaged. And the degree of privatization is greater in the former case.. 2.6 Conclusion We consider a single market made up of one semipublic firm and one multinational firm producing homogeneous good. It assumes that a pollutant is associated with the production of the good and foreign investors allow to foreign ownership on domestic firm. We have shown that along with an increasing proportion of foreign stockholding of multinational firms, government should decrease the degree of privatization. If the foreign ownership is highly allowed, with the higher standards of environmental policy, the environment has improvement. But social welfare deteriorates accompanied with the loss of industry profits and consumer surplus, even if the environment is less damaged.. 13.

(21) CHAPTER THREE: Partial Privatization and Environmental Policies in a Differentiated Mixed Duopoly This chapter considers a domestic mixed duopoly market where exists one public firm and one domestic private firm producing a differentiated good when the partial privatization of a public firm is allowed. We extend Rupayan Pal and Bibhas Saha (2010) to different types of environmental regulations: emission tax and emission quota compare two environmental policies. And examined how product differentiation affects social welfare and environment. We also analyze the effect of product differentiation on the level of privatization.. 3.1 Basic Model We consider a single market made up of one semipublic firm and one private firm producing differentiated good. The inverse demand function is given by pi  A  qi   q j , i, j  1, 2, i  j , where   [0,1] measures the degree of which. goods are substitutable. The two varieties of the good are independent when   0 , while they become perfect substitutes as  = 1.We assumes that all firms have the constant marginal production cost c. Accordingly, total consumer surplus is CS  Q2 / 2 . We assume that a pollutant is associated with the production of the good and each unit of good produced gives rise to one unit of pollution. The environmental damage is measured by a quadratic form ED . 1 d (q1  a1  q2  a2 ) 2 , where d is the 2. marginal environmental damage due to pollution. The objection of the semipublic firm is given by: 14.

(22) V   0  (1   )(CS   0  1 ). (3.1). where   [0,1] is interpreted to represent the degree of privatization. It indicates that the larger the value of  , the more the private ownership. When   0 , it is completely public-owned, and when   1 , it is fully private-owned. The social welfare can be expressed as. W  CS  1   2  T  ED. (3.2). In order to control the pollution, we assume government can set two different types of environmental policies: emission tax or emission quota. Following we consider these two case of environmental regulations and compare it.. 3.2 Emission tax Consider the case which government imposes an emission tax. The sequence of the three stage game is described as follows: Stage 1: The government decides the level of privatization (θ). Stage 2: The government chooses the emission tax (t) Stage 3: Each firm simultaneously and independently decides the quantity (qi) and the level of abatement (ai). The profit of firm i is given by:.  i   pi  c  qi  t (qi  ai ) . ai2 2. (3.3). where t is the emission tax impose by government. In the third stage of the game, each firm chooses output simultaneously. 15.

(23) V  A  c  t  (1   )q1   q2  0 q1  2  A  c  t   q1  2q2  0 q2. (3.4). V  t  a1  0 a1  2  t  a2  0 a2. From the above first-order conditions, we obtain the results. ( A  c  t )(  2)  2  2(1   ) ( A  c  t )(    1) q2   2  2(1   ) a1  a2  t q1 . (3.5). In the second stage, the government sets emission tax to maximize the social welfare. Substitute (3.5) into social welfare and differentiating it with respect to t, we obtain the optimal emission tax t. ( A  c)(d (2 (1   )  5  7)(2    3)  1   2 (1   )   (6   )   (2  6 )) 13  2 3  2 4  2 (  1)  9 (2   )  2 2 (6  5 )  d (7  2 (1   )  5 ) 2. (3.6). In the first stage, social welfare is obtained by substituting t (θ) and qi (θ) in the expression of SW. Solving this problem we get the social welfare maximizing level of privatization as follow.. T . 1    2 2 9  7. Substituting  * back to qi and t, we get the following SPNE outcomes as follows: tT . ( A  c)(  2d (7  6 )  1) 9  7 2  2d (17  7 (1   )). q1T . ( A  c)(1  2d )(9  7 ) 9  7 2  2d (17  7 (1   )). q2T . 5( A  c)(1  2d )(1   ) 9  7 2  2d (17  7 (1   )). 16.

(24) 1T . ( A  c)2 (19  4d (11  67d )  2  4(17  80d )d   7(7  8d (4  d )) 2  28(1  2d ) 2  3 ) 2(9  7 2  2d (17  7 (1   ))) 2.  2T . 2 ( A  c)2 (51(  1) 2 4d (  1)(44  43)  4d (99  2 (43  92))) 2 2 2(9  7  2d (17  7 (1   ))). EDT . 2( A  c)2 d (8  7 )2 (9  7 2  2d (17  7 (1   ))) 2. CS T . ( A  c)2 (1  2d )2 (53   (43   (43  35 ))) (9  7 2  2d (17  7 (1   ))) 2. SW T . ( A  c)2 (1  2d )(8  7 ) 9  7 2  2d (17  7 (1   )). This case has been done by Rupayan Pal and Bibhas Saha (2010).. 3.3 Emission quota Consider the case which government imposes an emission quota. Where the profit of firm i is given by: ai2  i   pi  c  qi  i, j  1, 2 2. (3.7). The social welfare can be expressed as. W  CS  1   2  ED. (3.8). The sequence of the three stage game is described as follows: Stage 1: The government chooses the level of privatization (θ) Stage 2: The government chooses e to maximize W Stage 3: The two firms compete in the market by choosing output and the level of abatement simultaneously. The maximization problem of each firm is given by max V (q1 , q2 ). s.t. e  e1. max  2 ( q1 , q2 ). s.t. e  e2. q1. q2. (3.9). 17.

(25) In accordance with Kato (2010), we substitute ai  ai (qi , e )  qi  e into each objective function. In the third stage of the game, each firm chooses output simultaneously. V  A  c  e  (2   )q1   q2  0 q1  2  A  c  e   q1  3q2  0 q2. (3.10). From the above first-order conditions, we obtain the results. q1 . ( A  c  e )(  3) ( A  c  e )(    2) , q2  2   3(2   )  2  3(2   ). (3.11). In the second stage, the government sets e to maximize the social welfare. Substitute (3.11) into social welfare and differentiating it with respect to e , we obtain the result e. ( A  c)((  4) (2   )  7  2 2  17(1   )) (3.12) 2 2 2  (8   ( (  1)  10))  (7  6 )  7  19(1   )  2d (  3(2   )). In the first stage, where social welfare is obtained by substituting e (θ) and. qi (θ) in the expression of SW. Solving this problem we get the social welfare maximizing level of privatization as follow:. Q .  2  2 4  9. Substituting  * back to qi , we get the following SPNE outcomes as follows: e. ( A  c)(8  17) 8(  1)  8d (2 2  9)  19. q1Q . 2( A  c)(1  2d )(4  9) 6( A  c)(1  2d )(  2) , q2Q  2 8(  1)  8d (2  9)  19 8(  1)  8d (2 2  9)  19. a1Q . ( A  c)(5  12d (  2)  2 ) ( A  c)(4d (4  9)  1) , a2Q  2 8(  1)  8d (2 2  9)  19 8(  1)  8d (2  9)  19. 1Q . ( A  c)2 (35  16d (4  9)(2 2  9)  16d 2 (4  9)(2 2  9)  8 (16   (4  17))) 2(8 (  1)  8d (2 2  9)  19) 2.  2Q . ( A  c)2 (143  432d (  2) 2 432d (2  2) 2 4 (11  40)) 2(8 (  1)  8d (2 2  9)  19) 2 18.

(26) CS Q . 2( A  c)2 (1  2d )2 (177   2 (24  77)) (8(  1)  8d (2 2  9)  19)2. SW Q . ( A  c)2 (1  2d )(8  17) 8(  1)  8d (2 2  9)  19. EDQ . 2( A  c)2 d (17  8 )2 (8(  1)  8d (2 2  9)  19)2. 3.4 The environment under emission tax and emission quota de 0 d. When the product is highly differentiated, higher emission quota worsen the environment damage more. Lemma 1. When the product is highly differentiated, the government sets a higher emission quota.. When the product is highly differentiated, the government raises the emission tax which will improve the domestic environment. When the product is highly substitutable, the environmental damage is greater under emission tax than under emission quota. In contrast, when the product is low level of substitutable, the environmental damage is greater under emission quota than under emission tax. Proposition 1. When the product is less (more) substitutable, the environmental damage is greater (lower) under emission quota than under emission tax.. This proposition extended the proposition 2 demonstrated by Wang and Wang (2009) in which the environment is more (less) damaged when the product is less (more) substitutable.. 19.

(27) 3.5 Optimal level of privatization We analyze the effect of product differentiation on the level of privatization:.  0.20. Q. T 0.15. 0.10. 0.05. 0.2. 0.4. 0.6. 0.8. 1.0. . When the product is highly substitutable,  Q is greater than  T .When the product is low level of substitutable,  T is greater than  Q . If the goods are perfect substitution, public firm is fully public-owned under emission tax. While the two varieties of the good are independent, public firm is fully public-owned under emission quota. When . 0.77 the optimal level of privatization is equals under emission tax and. emission quota.. dCS Q dQ Q 0 , 0 d d. With the higher degree of privatization, decrease of the total output due to the government paid less attention to domestic social welfare. It may deterioration the consumer surplus. Lemma 2. Along with increasing the degree of privatization, the total consumer surplus decrease.. 20.

(28) 3.6 Product differentiation on environment and social welfare under emission quota We analysis how the of product differentiation effect on domestic environment and social welfare under emission quota. dSW Q dEDQ 0 , 0 d d. We obtained by the above results, when the product is more substitutable, the degree of privatization increase. With the higher degree of privatization, less attention is paid to consumer surplus by the public firm coupled with less output. As decline of the market output, the environment is less damaged. But the social welfare may deterioration due to the loss of consumer surplus. If the product is more differentiated, although the consumers have more choice, but the factors of production diversification, with the highly emission quota, it may generate pollute harm the environment. Proposition 2. When the product is highly differentiated, a high emission quota will improve the social welfare. But the environment is more damaged.. 3.7 Conclusion We consider a single market made up of one public firm and one private firm producing differentiated good when the partial privatization of a public firm is allowed. It assumes that a pollutant associated with the production of the good and government implement environment policies to control the pollutant. When the product is less (more) substitutable, the environmental damage is greater (lower) under emission quota than under emission tax. If the product is highly differentiated, the social welfare is increase, with the highly emission quota, it may generate pollute harm the environment.. 21.

(29) CHAPTER FOUR: Trade Liberalization, Foreign Ownership and Environmental Tax with Consumption Externalities This chapter considers a trade model in which there are two private firms and one private foreign firm competing in a domestic country with consumption externalities. We extend Lai (2004) to more open economy that market allows foreign ownership. The domestic government sets the environmental tax to control the pollution that results from environmentally harmful consumption. We consider following two cases: Case 1: Only one domestic firm allow to foreign ownership. Case 2: Domestic industry complete open, all firms are allowing to foreign ownership. We analyze whether foreign ownership improves or deteriorates the environment and social welfare, and the effects of trade liberalization on environment.. 4.1 Basic Model Consider a single international market in which there exist two private firms and one private foreign firm competing in a domestic country. The inverse demand function is given by p  A  Q , where p is market price, Q  q1  q2  q f is the total output of the market. Accordingly, total consumer surplus is CS  Q2 / 2 . It assumes that government open domestic firm to foreign ownership, the cost of multinational firm as efficiency as foreign firm cf. ( c1  c f  0 ). The domestic government sets the environmental tax t to control the pollution that results from environmentally harmful consumption. Tax revenues collected by the government are T  tQ . Pollutant by consumption is ei  qi .The environmental 22.

(30) damage is ED  dQ , and d is the coefficient of the marginal environmental damage. Besides the environmental charge, the home country levies a tariff on import. We consider following two cases: Case 1: Only one domestic firm allow to foreign ownership. Case 2: Domestic industry complete open, all firms are allowing to foreign ownership. We analyze the effects of trade liberalization and whether foreign ownership improves or deteriorates the environment and social welfare.. 4.2.1 Case 1: One domestic firm allowed to foreign ownership Consider a single international market in which there exists one domestic firm (indexed by firm 1), one multinational firm (indexed by firm 2) and one private foreign firm competing in a domestic country. It assumes that the marginal production cost of the domestic firm is higher than that of the foreign firm ( c1  c f  0 ). Which is means the investment by foreign investors into firm 2 leads to more efficient production technology relative to firm 1. The profit of firm 1 is given by:. 1   A  q1  q2  q f  c1  t  q1. (4.1). where c1 is the constant marginal production cost of domestic firm. The profit of firm 2 is given by:.  2   A  q1  q2  q f  c f  t  q2. (4.2). where c f is the constant marginal production cost that investment by foreign investors into firm 2 leads to more efficient production technology relative to firm 1. The profit of the foreign firm f is given by:.  f   A  q1  q2  q f  c f  t    q f. (4.3) 23.

(31) where τ is the tariff rate, τ ≥ 0. The environmental tax is imposed by the government and its objective is to maximize social welfare, which comprises the consumer surplus CS, the producer surplus 1   2 , the tax revenues collected by the government T and the tariff revenues on import, less the environmental damage ED. Thus, the social welfare can be expressed as. W  CS  1   2  tQ   q f  ED. (4.4). where   [0, 1] represents the degree of domestic ownership of the multinational firm. When α=1, foreign ownership are not allowed so that the private firm in the market is owned by domestic stockholders. When α=0, it corresponds to the case of full foreign ownership. It is assumed that foreign ownership transfers the profit of the multinational from domestic country to the foreign country. Then the domestic welfare is not related to the profit of the proportion of foreign holdings. The game is constructed by two-stage decision-making. During the first stage, the government chooses the environmental tax. In the second stage, each firm maximizes its own profits to choose its quantity simultaneously. We solved by using the backward induction method to get a Sub-game Perfect Nash equilibrium (SPNE). In the second stage, each firm maximizes its own profits to choose its quantity simultaneously. Thus, the firms play Cournot games in a domestic market. Differentiating (4.1) , (4.2) and (4.3) with respect to q1 , q2 and q f , we obtain the following first-order conditions  1  A  t  c1  2q1  q2  q f  0 q1  2  A  t  c f  q1  2q2  q f  0 q2  f q f. (4.5).  A  t    c f  q1  q2  2q f  0 24.

(32) From the above first-order conditions, we obtain the results 1 q1  ( A  t    3c1  2c f ) 4 1 q2  ( A  t    c1  2c f ) 4 1 q f  ( A  t  3  c1  2c f ) 4. (4.6). It shows that an increase in t reduces each firm’s output by the same amount. A reduction in tariff will increase import but decrease domestic output. The decrease in domestic output is less than the increase in import, and therefore the total consumption in the Home country raise as tariff decreases, which is the same as Lai’s (2004) obtain. In the first stage, the government sets the environmental tax to maximize the social welfare. We substitute (4.6) into (4.4) and thus social welfare is given by: W. 1 (8 ( A  t  3  c1  2c f )  2 ( A  t    c1  2c f )2  2( A  t    3c1  2c f )2  8d (3 A  3t    c1  2c f )  8t (3 A  3t    c1  2c f )  (3 A  3t    c1  2c f ) 2 ) 32. Differentiating it with respect to t, we obtain the optimal environmental tax.. t* . A  12d  2 A  7  2  (2  5)c1  (6  4 )c f 13  2. (4.7). Substituting t back to qi , we get the following SPNE outcomes as follows: q1*  q2*  qf * . 3 A  3d  5  (11  2 )c1  2(  4)c f 13  2 3 A  3d  5  2c1  5c f 13  2 3 A  3d  8  2  2c1  5c f. (4.8). 13  2. Substituting (4.7) and (4.8) into profit function (4.1) (4.2) and (4.3), we have. 1* . 2  *. (3 A  3d  5  (2  11)c1  2(  4)c f ) 2 (13  2 )2. (3 A  3d  5  2c1  5c f ) 2 (13  2 )2. , f  *. (3 A  3d  8  2  2c1  5c f ) 2 (13  2 )2. We can obtain consumer surplus, environmental damage and social welfare as 25.

(33) follows:. CS  *. ED* . (9 A  9d  2  2  (2  7)c1  2(1   )c f ) 2 2(13  2 )2 d (9 A  9d  2  2  (2  7)c1  2(1   )c f ) 13  2. 1 4  26 2 (9 A  18 Ad  9d 2  4 A  4d  4 A  4d  14 2  6 2  (2  17)c12  SW * . 2(2 A(1   )  2d (1   )    4 )c f  2(6   )c 2f  c1 (14 A  14d  4 A  4d  6  4  20c f )). 4.2.2 Case 2: All domestic firms allowed to foreign ownership Consider a single international market in which there exist two multinational firms and one private foreign firm competing in a domestic country. It assumes that two domestic firms are foreign ownership, the cost of both firms are as efficiency as foreign firm cf. The profit of firm 1 is given by:. 1   A  q1  q2  q f  c f  t  q1. (4.9). The profit of firm 2 is given by:.  2   A  q1  q2  q f  c f  t  q2. (4.10). The profit of the foreign firm f is given by:.  f   A  q1  q2  q f  c f  t    q f. (4.11). where τ is the tariff rate, τ ≥ 0. The environmental tax is imposed by the government and its objective is to maximize social welfare, which comprises the consumer surplus CS, the producer surplus 1   2 , the tax revenues collected by the government T and the tariff revenues on import, less the environmental damage ED. 26.

(34) Thus, the social welfare can be expressed as. W  CS   1   2  tQ   q f  ED. (4.12). The game is constructed by two-stage decision-making. During the first stage, the government chooses the environmental tax. In the second stage, each firm maximizes its own profits to choose its quantity simultaneously. We solved by using the backward induction method to get a Sub-game Perfect Nash equilibrium (SPNE). In the second stage, each firm maximizes its own profits to choose its quantity simultaneously. Thus, the firms play Cournot games in a domestic market. Differentiating (4.9), (4.10) and (4.11) with respect to q1 , q2 and q f , we obtain the following first-order conditions,  1  A  t  c f  2q1  q2  q f  0 q1  2  A  t  c f  q1  2q2  q f  0 q2  f q f. (4.13).  A  t    c f  q1  q2  2q f  0. From the above first-order conditions, we obtain the results 1 q1  ( A  t    c f ) 4 1 q2  ( A  t    c f ) 4. (4.14). 1 q f  ( A  t  3  c f ) 4. In the first stage, the government sets the environmental tax to maximize the social welfare. We substitute (4.14) into (4.12) and thus social welfare is given by: W. 1 (4 ( A  t    c f )2  8 ( A  t  3  c f )  8d (3 A  3t    3c f )  8t (3 A  3t    3c f )  (3 A  3t    3c f ) 2 ) 32. Differentiating it with respect to t, we obtain the optimal environmental tax.. t* . A(3  4 )  12d  5  4  (3  4 )c f 15  4 27. (4.15).

(35) Substituting t back to qi, we get the following SPNE outcomes as follows:. q1* . 3 A  3d  5  3c f 15  4 3 A  3d  5  3c f. q2* . 15  4 3 A  3d  10  4  3c f qf *  15  4. (4.16). Substituting (4.15) and (4.16) into profit function (4.9) (4.10) and (4.11), we have.   * 1. (3 A  3d  5  3c f ) 2 (15  4 ) 2. (3 A  3d  5  3c f ) 2. 2  *. (15  4 )2. f  *. (3 A  3d  10  4  3c f ) 2 (15  4 )2. We can obtain consumer surplus, environmental damage and social welfare as follows:. CS  *. ED*  SW  *. (9 A  9d  4  9c f ) 2 2(15  4 )2. d (9 A  9d  4  9c f ) 15  4 9 A2  18 Ad  9d 2  8 A  8d  20 2  12 2  2(9 A  9d  4 )c f  9c 2f 30  8. 4.2.3 Special Case We consider the case all domestic firms are restriction to foreign ownership. It assumes that domestic industry are not allowing to foreign ownership. We get the following SPNE outcomes as follows:. q1* . 3 A  3d  5  7c1  4c f 11 28.

(36) q2 *  qf * . 1* .  2*   f* . t* . 3 A  3d  5  7c1  4c f 11 3 A  3d  6  4c1  7c f 11 (3 A  3d  5  7c1 +4c f ) 2 121. (3 A  3d  5  7c1 +4c f )2 121 (3 A  3d  6  4c1  7c f )2 121  A  12d  9  6c1  5c f. CS *  ED* . 11 (9 A  9d  4  10c1  c f )2 242 d (9 A  9d  4  10c1  c f ) 11 9 A  18 Ad  9d 2  8 A  8d  8 2  16c12  2( A  d  2 )c f  5c 2f  4c1 (5 A  5d    3c f ) 2. SW * . 22. 4.3 Comparisons of the output under different cases Lemma 1. In equilibrium, Case 1:. q2*  q1*  c1  c f  0 q2*  q f *    0 q f *  q1*  c1  c f  . q f *  q1* If c1  c f   q1*  q f * If c1  c f   dQ* 6(3 A  3d  5  2c1  5c f )  0 d (13  2 )2 The output of multinational firm is greater than the domestic firm’s output and foreign firm’s output. 29.

(37) Due to the profit shifting effect, if the cost gap of the domestic firm and foreign firm is greater than tariff rate, the foreign firm’s output will greater than domestic firm’s output. If the cost gap of the domestic firm and foreign firm is less than tariff rate, the domestic firm’s output will greater than foreign firm’s output. Case 2:. q1*  q*f   q2*  q*f  . q1*  q2*  q*f dQ* 12(3 A  3d  5  3c f )  0 d (15  4 )2 The output of multinational firm is greater than foreign firm’s output. No matter what types of market structures, when increase in foreign stockholding of multinational firm. With foreign ownership transfers the profit of the multinational from the domestic country to the foreign country. The profit shifting effect will result in decline of output. Proposition 1. With the domestic private firm open to foreign ownership, the profit shifting effect will decrease the domestic output.. 4.4 Foreign ownership on environment and social welfare We now want to consider the impact of change in foreign ownership on environment and social welfare.We derive the total impact of foreign ownership on the environment by differentiating the environmental damage social welfare and environmental tax function with respect to α. We obtained the following results for different market structures: Case 1 :. 8(3 A  3d  5  2c1  5c f ) dt *  0 d (13  2 )2 30.

(38) dED* 6d (3 A  3d  5  2c1  5c f )  0 d (13  2 )2. dSW * (3 A  3d  5  2c1  5c f )  0 d (13  2 )2 2. Case 2 :. 16(3 A  3d  5  3c f ) dt *  0 d (15  4 )2 dED* 12d (3 A  3d  5  3c f )  0 d (15  4 )2. dSW * 2(3 A  3d  5  3c f )  0 d (15  4 )2 2. According to the above results, we know that no matter what types of market structures. When the domestic private firm open to foreign ownership. Due to foreign ownership, less attention is paid to domestic environment by all by foreign investors. More tighten environment taxes levied by the government. With the higher standards of environmental policy, domestic environmental have improvement. But it may deterioration of the social welfare because the loss of consumer surplus. This result which is the same as Ohori (2011) obtains. Proposition 2. When the domestic private firm open to foreign ownership. Due to foreign ownership, less attention is paid to domestic environment by all by foreign investors. With the higher standards of environmental policy, improve the domestic environment.. 4.5 Trade Liberalization on Environment We now want to consider the impact of change in trade liberalization on environment.We derive the total impact of trade liberalization on the environment by differentiating the environmental damage and environmental tax function with respect 31.

(39) to τ. We obtained the following results for different market structures: Case 1 :. dt * 7  2  0 d 13  2 dED* 2d (1   )  0 d 13  2 Case 2 :. dt * 5  4  0 d 15  4 dED* 4d  0 d 15  4 According to the above results, we know that no matter what types of market structures, there is a negative relationship between tariff rate τ and environmental taxes t. With increasing tariff rate, domestic environment become worsen. If the government opens the market wholly to reduce the tariff rate, the consumption in domestic will increase. The consumption may harm to domestic environment so government will strict the environmental regulation. It may improve the environment, since the government raises the environmental tax. This result which is the same as Lai’s (2004) finds. Proposition 3. When the domestic market increases its openings, the tariff reduction brings positive effects on the environment due to the higher standard of environmental policy.. 4.6 Conclusion Consider a single international market there exist two private firms and one private foreign firm competing in a domestic country with trade liberalization. It assumes that government open domestic firm allow to foreign ownership. The 32.

(40) domestic government sets the environmental tax to control the pollution that results from environmentally harmful consumption. We show that when the domestic market increases its openings, the tariff reduction brings positive effects on the environment. While the domestic private firm open to foreign ownership. With the higher standards of environmental policy, also improve the domestic environment.. 33.

(41) CHAPTER FIVE: CONCLUSIONS Recent years, public are being to concern about the environmental issues. Developing countries paid more and more attention on environment policy. In pace with the globalization of the world economy, we consider market-opening policies: privatization, trade liberalization and open of foreign ownership restriction with environmental issues. In chapter two, we consider a single market made up of one semipublic firm and one multinational firm producing homogeneous good. It assumes that a pollutant is associated with the production of the goods. We have shown that along with an increasing proportion of foreign stockholding of multinational firms, government should decrease the degree of privatization. If the foreign ownership is highly allowed, with the higher standards of environmental policy, the environment has improvement. But social welfare deteriorates accompanied with the loss of industry profits and consumer surplus, even if the environment is less damaged. In chapter three, we consider a domestic mixed duopoly market where exists one public firm and one domestic private firm producing a differentiated good when the partial privatization of a public firm is allowed. We extend Rupayan Pal and Bibhas Saha (2010) to different types of environmental regulations: emission tax and emission quota. It is shown that when the product is more substitutable, the environment is less damaged. But the social welfare may deterioration. When the product is less (more) substitutable, the environmental damage is greater (lower) under emission quota than under emission tax. In chapter four, we analyze the effects of trade liberalization and whether foreign ownership improves or deteriorates the environment and social welfare. We consider a trade model in which there are two private firms and one private foreign firm 34.

(42) competing in a domestic country with consumption externalities. We extend Lai (2004) to more open economy that market allows foreign ownership. The domestic government sets the environmental tax to control the pollution. We consider two cases: Case 1: Only one domestic firm allow to foreign ownership. Case 2: Domestic industry complete open, all firms are allowing to foreign ownership. We show that the tariff reduction brings positive effect on the environment. When the domestic private firms are open for foreign ownership, the stringent environmental policy improves the environment.. 35.

(43) References Bárcena-Ruiz, J. and M. Garzón (2006) “Mixed Oligopoly and Environmental Policy” Spanish Economic Review 8, 139–160. Beladi, H. and C.C. Chao (2006) “Does Privatization Improve the Environment?” Economics Letters 93, 343–347. Chao, C.C. and E.S.H. Yu (2007) “Trade Liberalization, Foreign Ownership, and the Environment in a Small Open Economy” International Review of Economics and Finance 16, 471–477. Kato, K. (2011) “Emission Quota versus Emission Tax in a Mixed Duopoly” Environ Econ Policy Stud 13, 43–63. Kato, K. (2011) “Partial Privatization and Environmental Policies” Mimeo, Asia University. Lai, Y. B. (2004) “Trade Liberalization, Consumption Externalities and the Environment” Economics Bulletin 17(5), 1-9. Ohori, S. (2006) “Trade Liberalization, Consumption Externalities and the Environment: A Mixed Duopoly Approach” Economics Bulletin 17(5), 1-9. Ohori, S. (2011) “Environmental Policy Instruments and Foreign Ownership” Environ Econ Policy Stud 13, 65–78. Pal, R. and B. Saha (2010) “Does Partial Privatization Improve the Environment?” Working paper, Indira Gandhi Institute of Development Research. Simpson, R.D. (1995) “Optimal Pollution Taxation in a Cournot Duopoly” Environmental and Resource Economics 6, 359–369. Wang, L.F.S. and T.-L. Chen (2011) “Mixed Oligopoly, Optimal Privatization, and Foreign Penetration” Economic Modelling 28, 1465-1470. Wang, L.F.S. and J. Wang (2009) “Environmental Taxes in a Differentiated Mixed 36.

(44) Duopoly” Economic Systems 33(4), 389-396. Wang, L.F.S., Y.C. Wang and L.H. Zhao (2009) “Privatization and the Environment in a Mixed Duopoly with Pollution Abatement” Economics Bulletin 29(4), 3112-3119. Wang, L.F.S., Y.C. Wang and T.-L. Chen (2007) “Trade Liberalization and Environmental Tax in Differentiated Oligopoly with Consumption Externalities” Economics Bulletin 17(8), 1-9.. 37.

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