Water quality management for agricultural production is a complicated and interesting problem. Hydrological and economic factors must be considered when designing strategies to reduce nutrient runoff from agricultural activities. This dissertation is composed of three chapters that investigate cost-effective ways to mitigate water pollution from agricultural nonpoint pollution sources and explore farmers' incentives when participating in water quality trading programs. Chapter 1 investigates landscape targeting of best management practices (BMPs) based on topographic index (TI) to determine how targeting would affect costs of meeting nitrogen (N) loading goals for Mahantango watershed, Pennsylvania. We use the results from two climate models and the mean of the ensemble of seven climate models to estimate expected climate changes and the Soil and Water Assessment Tool-Variable Source Area (SWAT-VSA) model to predict crop yields and N export. Costs of targeting and uniform placement of BMPs across the entire study area (4.23 km2) are compared under historical and future climate scenarios. We find that with a goal of reducing N loadings by 25%, spatial targeting methods could reduce costs by an average of 30% compared with uniform BMP placement under three historical climate scenarios. Cost savings from targeting are 38% under three future climate scenarios. Chapter 2 scales up the study area to the Susquehanna watershed (71,000 km2). We examine the effects of targeting the required reductions in N runoff within counties, across counties, and both within and across counties for the Susquehanna watershed. We set the required N reduction to 35%. Using the uniform strategy to meet the required N reduction as the baseline, results show that costs of achieving a regional 35% N reduction goal can be reduced by 13%, 31% and 36% with cross-county targeting, within-county targeting and within and across county targeting, respectively. Results from Chapters 1 and 2 suggest that cost effectiveness of government subsidy programs for water quality improvement in agriculture can be increased by targeting them to areas with lower N abatement costs. In addition, targeting benefits are likely to be even larger under climate change. Chapter 3 investigates the landowner's nutrient credit trading behavior when facing the price uncertainty given the credits are allowed to be banked for future use. A two-step decision model is used in this study. For the first step, we determine the landowner's application level of a BMP on working land in the initial time period. The nutrient credits awarded to the landowner depend on the nutrient reduction level at the edge of field generated by the BMP application. For the second step, we use an intertemporal model to examine the landowner's credit trading behavior with stochastic price fluctuations over time and with transaction costs. The theoretical framework is applied with a numerical simulation incorporated with a hydro-economic model and dynamic programming. Nutrient Management (NM) is selected as the BMP on working land to generate N credits. We find that gains to the landowner from credit banking increase with higher price volatility and with higher price drift, but that gains are larger with price volatility. However, for a landowner holding a small amount of nutrient credits, the gains from credit banking are small due to transaction costs. / Doctor of Philosophy / Two considerations are critical for efforts to mitigate nutrient runoff from nonpoint sources: cost effectiveness of strategies to reduce nutrient runoff and landowners' incentives to participate in these programs. This dissertation is composed of three manuscripts, aiming to evaluate the cost effectiveness of government subsidy programs for water quality management in agriculture and investigate the landowner's incentives to participate in water quality trading programs for the Chesapeake Bay watershed. Chapter 1 investigates gains from targeting Best Management Practices (BMPs) under current and future climate conditions based on the soil characteristics relative to uniform BMP application for a small experimental watershed (4.23km2). Chapter 2 scales up the study area to a 71,000 km2 watershed and treats each county within the watershed as a representative farm to explore economic gains from targeting within county and across county based on counties' physical conditions and agricultural patterns. Both Chapters show that cost-effectiveness of government subsidy programs can be improved by spatial targeting BMPs to areas with lower abatement costs. Gains from targeting increase under climate change. In Chapter 3 we shows how a landowner's revenues from nutrient credit selling will be affected if the credits are allowed to be banked for future use when she faces price uncertainty. We find that gains to the landowner from credit banking increase more with higher price volatility than with higher price drift. Gains from banking are largely reduced by transaction costs associated with trading.

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