This dissertation applies economic analysis and integrated assessment modeling to the problem of air pollution. While other authors have pursued this topic, the focus of this dissertation is unique. In essence, the work emphasizes heterogeneity in the marginal damages due to emissions of the criteria air pollutants according to the location of the source. Such variability has important implications both for evaluating the benefits of existing policy and in terms of designing new policy. While the environmental economics literature has long recognized that spatial heterogeneity in damages may occur, limitations in both science and economics have precluded the pursuit of policies that accommodate variable damages. Also due to such limitations, estimates of the degree of variation and, hence, the welfare effects of policies which treat all sources alike, are few and far between. This document provides a set of spatially-comprehensive estimates of the marginal damage for emissions of the criteria air pollutants, while maintaining the resolution necessary to perceive spatial heterogeneity at individual sources and source counties.

Following an introduction and a literature review, chapter 3 explores the integrated assessment model that is used to compute the marginal damage estimates corresponding to emissions of the criteria air pollutants from a large number of sources. Chapter 4, the first analytical chapter, uses the marginal damage estimates from each source to compute the gross annual damages emissions of the criteria air pollutants by multiplying the marginal damages time the quantity of emissions on a source-by-source basis. Chapter 5 develops a new approach to prioritizing future abatement strategies in a sub-optimal regulatory setting based on the net marginal benefits of abatement. Chapter 6 argues that while market-based policies pursuing cost-effectiveness have generated considerable cost savings, the remaining welfare gains associated with moving policy toward an efficient allocation appear to be substantial. This chapter provides empirical estimates of the marginal damages of emissions and an estimate of the welfare gain of regulating nearly 660 electric generating units efficiently relative to cost-effective policy. The theme that unifies each of the three analytical chapters is spatial heterogeneity in the marginal damages of emissions and how such information affects air pollution policy.