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