Partial privatization and government preference

Ferreira, Fernanda A.; Ferreira, Flávio

http://hdl.handle.net/10400.22/9108

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Authors

Ferreira, Fernanda A.

Ferreira, Flávio

Abstract(s)

Studies of mixed oligopoly models have been increasingly popular in recent years. We can say that the main concerns of the privatization studies are the welfare effect and the method of privatization. Ferreira and Ferreira (2014) analysed the relationship between the privatization of a public firm and government preferences for tax revenue in a duopoly model, by assuming that the government payoff is given by a weighted sum of tax revenue and the sum of consumer and producer surplus. In this paper, we study the relationship between the partial privatization of the public firm and the government preferences for tax revenue. We consider a duopoly model with one semi-public firm and one private firm competing à la Cournot, that is choosing their outputs simultaneously. The private firm aims to maximize its own profit and we the objective function of the semi-public firm is a weighted sum between its own profit and the sum of consumer and producer surplus. The government imposes a specific tax on the production, and, furthermore, it chooses the level of privatization of the semi-public firm. The government payoff is the weighted sum between the sum of consumer and producer surplus and the tariff revenue. The timing of the game is as follows. In the first stage, the government sets the tax rate and the level of privatization of the semi-public firm. In the second stage, each firm simultaneously chooses its output to the market. We compute the outputs at equilibrium and we show that full privatization will decrease (i) the specific tax rate; (ii) the aggregate output in the market; and (iii) the government’s payoff. In addition, full privatization will increase the profits of both firms. Furthermore, we show that as the government preference for the tax revenue becomes large, (i) the optimal tax rate increases, (ii) the output of both firms decrease; and (iii) the government payoff decreases. This paper contributes to the framework of partial privatization in a market with a specific tax on the production.