This dissertation consists of three empirical analyses examining the interactive and evolving nature of government regulations and how the regulated industries respond to the changes in the regulatory climate. Using the U.S. pulp and paper mills as an example, the three essays bring together a number of strands of literature in environmental economics and policy studies discussing how changes in the U.S. environmental policy are shaped by industry concerns and which strategies firms choose in order to adjust to the changes in policy. Essay 1 examines if, in addition to the standard input factors, indirect costs associated with tax and environmental policies affect papermakers’ ‘stay put’ investment decisions. The findings suggest that state environmental stringency has a negative impact on investments, but it is statistically insignificant and higher taxes do not deter investments. The Essay 2 studies whether voluntary abatement and prevention efforts at pulp and paper mills affects regulatory stringency they face. The analysis tests the hypotheses of ‘responsive regulation’ and whether regulators are driven by numerical pollution targets or budgetary constraints. The findings suggest that voluntary pollution abatement and prevention have greater impact on regulatory stringency than government budgets. Finally, Essay 3 analyzes the relationship between pollution prevention (P2) policy instruments and adoption of P2 modifications. The study tests the hypotheses of whether P2 policy instruments have positive impact on P2 adoptions. The results suggest that the policy instruments have different effects on different types of P2 modifications and that regulatory and political threat is a strong predictor of P2 adoptions.