Abstract Assuming that consumption goods are differentiated in terms of environmental friendliness in a mixed duopolistic market, we present an analysis of public firm privatization effects on the environment and social welfare. The public firm maximizes the weighted average of its profit and social welfare. The private firm maximizes its profit. Consumers are aware of the environmental friendliness of goods. We demonstrate that an increase in the degree of public firm privatization lowers its environmental R&D investment and output. The decreased public firm’s R&D in turn lowers the private firm’s R&D investment through spillovers. The reduction of R&D investment by both firms decreases the environmental friendliness of these goods. Consumers consequently decrease their consumption of these goods. Therefore, if consumers exhibit environmental friendliness, then an increased degree of privatization might be socially undesirable.
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