Environmental R&D Risk Choices and Environmental Policies in a Mixed Duopoly

ABSTRACT This paper investigates how environmental policies—emission tax and emission standard—affect the optimal environmental R&D (ER&D) risk choices of firms in a mixed market. The results show that for the private firm, ER&D risk is lower (higher) under the emission tax than under the emission standard when consumer environmental awareness is low (high). For the public firm, ER&D risk is always higher under the emission tax than under the emission standard. We also show that a privatization policy always decreases the ER&D risk of the public firm but is likely to increase the ER&D risk of the private firm. Finally, we find that the private firm faces considerable welfare risk when consumer environmental awareness is high under the emission tax. However, the private firm's incentive for ER&D risk is always lower than the social incentive under the emission standard.