Effect of market fragmentation on ecological efficiency: evidence from environmental pollution in China

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Abstract
Local governments restrict cross-regional flows of factors and products for achieving the purpose of profit, which lead to market fragmentation. China’s domestic market is fragmented, leading to the situation that market boundaries are demarcated. We use the relative price method to measure market fragmentation and find that market fragmentation is indeed a serious problem in China. This study evaluates the ecological efficiency using the bootstrap DEA method that takes air and water pollution into account and investigates the effect of market fragmentation on ecological efficiency based on the system GMM approach by employing data from a panel of 29 provinces in China during the period 2000–2015. The results indicate that there are differences in ecological efficiency among provinces. The market fragmentation has negative impact on ecological efficiency, which shows market fragmentation significantly inhibits the improvement of ecological efficiency. The similar findings are confirmed by a series of robustness tests, which include the alternative indicator and sub-sample regression. Based on the above findings, the central government should reduce market fragmentation, promote market integration, increase the efficiency of resource allocation, and improve environmental quality.

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