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Abstract

We show under general demand and cost conditions that in a mixed duopoly with pollution the government can implement the socially optimal outputs and abatements by a tax-subsidy scheme and keeping the public firm fully public. The scheme requires taxing outputs and subsidizing abatements at different rates, unlike a pollution tax. Our result improves on the shortcoming of a pollution tax to implement the social optimum. We also show that when the private firm is partly foreign-owned, the government will adopt some privatization and will not implement the social optimum, though the social optimum is implementable.