Economic Geography and the Efficiency of Environmental Regulation

We develop a quantitative economic geography model with endogenous emissions, amenities, trade, and labor reallocation to evaluate the spatial impact of the leading air quality regulation in the United States: the National Ambient Air Quality Standards (NAAQS). We find that the NAAQS generate $40 billion in annual welfare gains. The gains are spatially concentrated in a small set of cities targeted by the NAAQS, and the improved amenities attract large numbers of nonmanufacturing workers into these areas. We use our model to analyze counterfactual policies and find that using first-best emissions pricing increases welfare by an additional $70 billion per year. Atmospheric transport of emissions, labor reallocation, and trade are first-order factors for quantifying the level and distribution of the costs and benefits of the NAAQS.