This thesis is a study on the strategic interactions between governments and firms under pollution. Governments make environmental policies and put them on their domestic firms. Firms decide their outputs and compete in the international market. Pollution are local or transboundary.
First, we discuss governments’ preference when their firms compete Cournot in the international market. Our results suggest that under local pollution governments tend to apply looser environmental policies on their firms which decrease their production costs. However, these polices become more stringent if governments and firms are under transboundary pollution.
Second, we analyze firms’ payoffs in Stackelberg competition and find that under this case, both governments and firms obtain less payoffs than what they can get when firms compete Cournot. This is different from the results that a firm can get more profits as the leader in Stackelberg model than its profits in Cournot model if there is no intervention from governments.
Finally, we discover governments’ and firms’ payoffs by collusion and compare all the possible choices for governments and firms. Our results shows that in the first stage governments choose collude in making environmental policies and in the second stage firms would collude in deciding their outputs.