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Abstract
This paper uses spatial econometrics to analyze air pollution externalities. State-by-state source-receptor transfer coefficients that can be used as a basis for a location-differentiated permit system are estimated. Results affirm the importance of regional transport in determin-ing local ozone air quality, although owing to non-monotonicities in ozone production the ex-ternality is not always negative. Because the origin of emissions matters, results also reject a non-spatially differentiated NOx cap and trade program as an appropriate mechanism for re-ducing ozone smog.