Based on a review of previous literature and an investigation of the empirical facts of market segmentation and environmental pollution in China, this study mainly analyses the impact of market segmentation on environmental pollution from the perspective of resource misallocation. The results generated by the Dynamic Panel Econometric Model show that market segmentation had a significant deteriorating effect on environmental pollution during the investigated period. In addition, market segmentation has significantly aggravated the misallocation of labour and capital resources, which is also an important factor leading to environmental pollution. As for the heterogeneity of different pollutants, market segmentation has a significant negative impact on sulpfur dioxide (SO₂), smoke and dust, suspended particles (PM_2.5), while for wastewater and solid waste, the impact is not significant. Furthermore, the effect of market segmentation on environmental pollution was significant in the period 2002–2007, and in the Eastern area, the impact was not significant due to the relatively high degree of market integration. The conclusions will provide a reference for optimizing the relationship between local governments, and improving the environmental quality of China.