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Public utility ownership and in-kind trade policy in vertically related markets

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  • Ryu, Han Eol

Abstract

This analysis examines the optimal government ownership level of an upstream public utility when considering an import tariff and a production subsidy. It analyzes a simple two-country model in which a home public and a foreign private utility firm in the upstream market supply their produced inputs exclusively to compatriot downstream firms that compete in the home country's final good market. The paper shows various conditions for determining the optimal level of government public utility ownership and the role of that ownership. If the import tariff and production subsidy are sufficiently small (or large), then the optimal government ownership policy will likely be complete (or partial) nationalization, and the ownership of the home public utility works as an in-kind subsidy to (or tax on) the home downstream firm. The analysis also examines a case where the home downstream firm monopolizes the market. It shows that the optimal policy is the complete nationalization of the upstream public utility. The World Trade Organization (WTO) limits the direct use of tariffs and subsidies as a strategic trade policy tool. Under such a situation, this paper suggests that government ownership of a public utility can be used as an in-kind trade policy tool, and privatizing without considering this role of public utilities may neglect a potentially useful trade policy channel.

Suggested Citation

  • Ryu, Han Eol, 2023. "Public utility ownership and in-kind trade policy in vertically related markets," Utilities Policy, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:juipol:v:81:y:2023:i:c:s0957178723000279
    DOI: 10.1016/j.jup.2023.101515
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    More about this item

    Keywords

    Public utility; Privatization; Vertically related market; Trade policy; Imperfect competition; Market structure;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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