The problem of pollution is not going away. As global Gross Domestic Product (GDP) rises, so does pollution. Due to the existence of environmental externalities, polluting firms lack the incentive to abate their pollution, and without regulations, markets do not adequately control pollution. While regulators are responsible for enacting regulations, the firms ultimately determine the environmental outcomes through their production decisions. Furthermore, polluting industries are typically large and concentrated, raising the concern that market power may be present in these industries. In this dissertation, we study the interactions between powerful, strategic, firms operating under pollution regulations and the regulator when markets are imperfectly competitive.;An important contribution of this work is our integrated pollution-production model, which incorporates the firms' emissions, abatement technologies, the damage from pollution, and three widely-used regulatory mechanisms-Cap, Cap-and-Trade, and Tax. The firms compete with each other and control prices by setting their production quantities. In our model, the firms have many options to comply with the pollution constraints enforced by the regulator, including abating pollution, reducing output, trading in emission allowances, paying emission taxes, investing in abatement innovations, colluding, and combining some of these options. Following the introduction in Chapter 1, we address three broad questions in three separate chapters. (1) Chapter 2: What is the effect of the pollution control mechanisms on firms, consumers, and society as a whole? Which mechanisms and policies should regulators use to control pollution in a fair, effective, and practical manner? (3) Chapter 3: Does Cap-and-Trade enable collusion? If it does, what are the effects of collusion? (3) Chapter 4: Which mechanisms encourage more investments in abatement innovations?;Our results apply to different types of pollutants and market structures. Our research provides guidelines for both policy-makers and regulated firms.
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