Abstract: This study uses the bilateral stochastic frontier model to measure the positive effect of upgrading of industrial structure on environmental pollution, the negative effect of factor market distortion on environmental pollution, and the net effect of the mutual influence. The results show that, the interaction between factor market distortion and upgrading of industrial structure weakens the role of factor market distortion in reducing the environmental pollution, which leads to the actual urban environment pollution level is higher than the moderate pollution level, and the net effect in both different years, different regions and different provinces increases environmental pollution, which shows that factor market distortion exacerbates environmental pollution; the analysis of time characteristics shows that the net effect of upgrading of industrial structure and factor market distortion on environmental pollution is positive and decreasing in the sample time interval; the net effect in different regions is still positive, but there are regional differences, with the largest net effect in the western region, followed by the middle region and the smallest in the east region, which shows factor market distortion in economically underdeveloped regions significantly weakens the positive effect of upgrading of industrial structure on environmental pollution, thus exacerbating the degree of environmental pollution.

Key words: upgrading of industrial structure, factor market distortion, environmental pollution, the bilateral stochastic frontier model