Abstract

Production efficiency of the firm is defined to be the maximum ratio of output to input in this paper. When a society reaches Pareto optima, this society achieves its aggregative efficiency. If the firm does not produce efficiently, transformation rate on production frontier does not make any sense because production frontier can be extended if the firm improves its own production efficiency. Therefore, production efficiency of the firm is the necessary condition of Pareto optima. Since total input is equivalent to total cost in the sense of aggregating different inputs, the concept of production efficiency of the firm can be mathematically converted into minimum cost (i.e., minimum input). When input is minimized, pollution that arises from production is minimized, ether. Thus, pollution is minimized by the efficient firm while the firm grows efficiently. This conclusion implies that government intervention is unnecessary. Consequently, the primary policy to reduce pollution would be promoting anti-pollution technology and subsiding the firm to upgrade its equipment as well as improving production efficiency of the firm rather than charging Pigovian tax and enforcing government regulation except that minimum pollution makes people not endure or environment not sustain. To summarize, this paper integrates efficiency, externality (e.g., pollution), market mechanism (e.g., supply and demand), government intervention (e.g., Pigovian tax), increasing return to scale and economic growth into growth model of the firm by which we are capable to propose pollution policy.

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