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

Han Eol Ryu

Utilities Policy, 2023, vol. 81, issue C

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.

Keywords: Public utility; Privatization; Vertically related market; Trade policy; Imperfect competition; Market structure (search for similar items in EconPapers)
JEL-codes: D43 D49 H44 L13 L22 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:81:y:2023:i:c:s0957178723000279

DOI: 10.1016/j.jup.2023.101515

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