Is air pollution a government failure or a market failure? Global evidence from a multi-dimensional analysis

Abstract

This paper studies the impact of the free market (FM) with different dimensions, the quality of governance (QG), and their interaction on air pollution for a global sample of 149 countries during 2000–2020. Results illustrate that FM increases air pollution while QG decreases it for the global sample. Remarkably, the interaction of FM and QG shows that FM increases air pollution until a threshold of QG, then above this level, FM reduces air pollution. However, the impacts of FM, QG, and their interaction on air pollution depend on income levels. In low-income and lower middle-income countries, FM increases air pollution while QG reduces it, but the marginal effect of FM on air pollution in the presence of QG is still statistically positive because the pollution-decreasing effect of QG is weaker than the pollution-increasing effect of FM due to low QG. In upper middle-income and high-income countries, FM, QG, and their interaction reduce air pollution due to high QG; and QG intensifies the reducing effect of FM on air pollution. Moreover, the impact of FM on air pollution depends on various dimensions of FM and the moderating effect of QG for the global sample and sub-samples of different income-country groups. The findings imply that low-income and lower middle-income countries should prioritize in improving QG while upper middle-income and high-income countries should prioritize in boosting FM in the battle against air pollution.