This paper considers the effect of product differentiation on the optimal degree of privatization and environmental taxes in a differentiated mixed duopoly market. We show that partial privatization and lower environmental taxes enhance the social welfare when the product is more substitutable, but nationalization and higher environmental taxes are the best policy combination when the product is complementary. We also show that social welfare and environmental damage decrease with the degree of product differentiation. However, partial privatization always degrades environmental quality irrespective of the degree of product differentiation.