Direct and Indirect Effects of Government Expenditures on Pollution Based on Simultaneous Equations System Approach

Some market activities have negative consequences such as pollution and destruction of environment. The market, despite its outputs, cannot product optimum quantity of goods and services and in other words it fails. In order to prevent market failure, government must intervene in the market activities through the policies of environmental protection and suitable regulation in order to reduce pollution and establish optimal conditions for production and consumption.
In order to investigate the effect of government expenditures on pollution, first a simultaneous equations system during 1975-2011 was specified, and after estimation of equations using two-stage least squares and three-stage least squares methods, the relationship between the direct and indirect effects of government expenditures and pollution on economy of Iran was studied.
Findings: The results from estimation of equations systems specified in static and dynamic approaches devide direct and indirect effects at show that i) the size of government only has the direct effect on per capita pollution ii) there is a significant and positive relationship between the government size and per capita emissions with elasticity coefficient of 0.08 in static approach and there is a significant and negative relationship between the government size and per capita emmisions with elasticity coefficient of -0.163 in dynamic approach. Therefore, increase of the government expenditure has a negative effect on pollution and decreases it in a period of time. In addition to government size, economic openness and consumption have a significant and positive effects and total investment and population have a significant and negative effects on the per capita pollution in economy of Iran.
The findings of this research can help in using appropriate policies such as improving public educations, proper execution of laws and regulations, strict enforcement of environmental laws and amplification of public infrastructure with the aim of environmental protection and pollution prevention.