Abstract: For a group of small-and-medium-size enterprises (SME), pollution can be controlled by the individual enterprises in an autonomous mode or by a specialized pollution control company in a centralized mode. The objective of this paper is to analyze the effectiveness of pollution control under the centralized mode. A game model is derived to describe the relationship between the SMEs and the pollution control company. Based on this model, the production output and profit for the SMEs, the profit for the pollution control company, and social welfare are analyzed for both pollution control modes. It is shown that, with the centralized mode, if marketoriented policy is applied the social welfare decreases and the centralized pollution control fails. However, with the centralized mode, the production output of SMEs and social welfare increase if there is government intervention by setting the upper bound of emission price. A method is presented for setting the upper bound of the emission price.

Key words: centralized pollution control, small and medium sized enterprises (SME), emission pricing