JOURNAL OF ENVIRONMENTAL ECONOMICS AND MANAGEMENT 9,304-3 10 ( 1982) The Backward Incidence of Pollution Control in a Rigid-Wage Economy’ EDEN S. H. Yu2 Division of Economics, University of Oklahoma, Norman, Oklahoma 73019 AND CHARLES A. INGENE Department of Business Administration, University of Washington, Seattle, Washington 9819.5 Received October 1980; revised April 198 1 The backward incidence of pollution controls onto the polluting and nonpolluting in- dustries is examined in a two-sector, rigid-wage economy characterized by unemployment in both the short run and the long run. As expected, more restrictive pollution controls result in contraction in the polluting sector and expansion in the nonpolluting sector. Somewhat unexpectedly, national income may rise with stronger pollution controls, if the polluting industry is relatively capital intensive. I. INTRODUCTION In a recent article published in this journal, Yohe [9] presented an interesting analysis of the backward incidence of pollution controls onto the factors of produc- tion in a two-sector, full-employment, general-equilibrium model. It was shown that, at constant factor supplies and output prices, national income falls with decreases in the allowable level of pollution, the polluting sector contracts, and the nonpolluting sector expands.3 It is noteworthy that Yohe, unlike many economists, treats pollu- tion as an input rather than an output in the production process. Thus compensation is paid by the pollution-emitting firm for its use of the environment.4 This somewhat ‘The authors are indebted to two anonymous referees and B. R. Hazari of the University of the South Pacific for helpful comments on an earlier version and to Larry Eubanks of the University of Oklahoma for useful discussions. The first author also acknowledges research support from the College of Business Administration of the University of Oklahoma. An earlier version was presented at the WEA Interna- tional Conference, July 2-6, 1981; R. Rowe of ABT Associates Inc., S. Holt of the University of California at Santa Crux, and J. R. Miller of the University of Utah offered useful comments. The authors, listed in accordance with a random selection process, bear the responsibility for any remaining shortcomings in this paper. *To whom all correspondence should be addressed. 3Another major result obtained by Yohe is that at constant factor supplies and output prices, the real returns to capital and labor move in opposite directions and the shadow price of pollution increases in the presence of more restrictive pollution controls. 4Yu [Ill, for example, uses a model involving pollution as a joint product of polluting industries to deduce a set of optimal intervention policies for achieving efficient resource allocation in a three-sector general-equilibrium model. 304 0095~0696/82/040304-07$02.00/O Copyright 0 1982 by Academic Press, Inc. All rights of reprcduction in any form reserved