This dissertation consists of two closely related parts: theory development and coding of correlation effects in a model potential for solvation, and study of solvent effects on chemical reactions and processes. The effective fragment potential (EFP) method has been re-parameterized, using density functional theory (DFT), more specifically, the B3LYP functional. The DFT based EFP method includes short-range correlation effects; hence it is a first step in incorporating the treatment of correlation in the EFP solvation model. In addition, the gradient of the charge penetration term in the EFP model was derived and coded. The new method has been implemented in the electronic structure code GAMESS and is in use. Formulas for the dynamic dipole polarizability, C(sub 6) dispersion coefficient and dispersion energy were derived and coded as a part of a treatment of the dispersion interactions in the general solvation model, EFP2. Preliminary results are in good agreement with experimental and other theoretical data.