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Optimal Green Shift, R&D-Generated Growth, and the Risk of Environmental Disaster. Helsinki GSE Discussion Papers 35/2025.

Abstract. Heterogeneous monopolists produce goods using either brown technology, which relies on labor and carbon energy, or green technology, which relies solely on labor. R&D firms enhance productivity using labor to outcompete existing monopolists, thereby driving economic growth. The extraction of carbon energy releases pollutants that harm production and increase the risk of environmental disaster. The government can optimally mitigate the distortions caused by pollution by a two-part Pigouvian tax on carbon energy, with one part being precautionary, applied only before any disaster occurs. When this tax is optimally set, R&D should neither be taxed nor subsidized.

  • Paper resented in the 16th Viennese Conference on Optimal Control and Dynamic Games, Technical University, July 2025, Wien

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Optimal Policy with R&D-based Growth and the Risk of Environmental Disaster. Helsinki GSE Discussion Papers No. 19/2023.

Abstract.  The extraction of carbon energy contributes to the global stock of pollution, increasing the risk of welfare-damaging environmental disaster. The governments of the countries educate workers as scientists. Oligopolists produce goods by workers and carbon energy. R&D Firms improve effciency by scientists to supplant incumbent oligopolists through competition, which generates economic growth. In this setup, an international central planner can decentralize the social optimum by setting a precautionary tax on emissions before the occurrence of the disaster. That tax hampers pollution, but speeds up economic growth. The socially optimal level of the tax is derived.

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Optimal Factor Taxation with Credibility. Impact of Scientific Computing on Science and Society. Edited by P. Neittaanmäki and M.-L. Rantalainen. Springer Verlag 2023.

Abstract:  In this document, optimal factor taxation is examined when output is produced from labor and capital and some (or all) households save in capital. Main results are as follows. There is a reputational equilibrium where the government has no incentive to change its announced tax policies. In that equilibrium, the assertion of zero capital taxation holds, independently of the wage earners’ savings behavior and their weight in the social welfare function. A specific elasticity rule is derived for the optimal wage tax. Finally, it is shown how fertility and mortality can be introduced as endogenous variables in the model.

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Optimal Population Policy with Health Care and Lethal Pollution (co-authored with Ulla Lehmijoki); Portuguese Economic Journal (2023) 22:31–47

Abstract.  Optimal population policy is examined in the following setup. Families invest in capital, spend on health care and determine their number of children. Firms produce output from labor, capital and pollutants. Pollution increases, but private and public health care decrease mortality dynamically, with lags. Our main findings are the following. A marginal increase in public health care improves welfare as long as it diminishes the mortality rate more than that in private health care. The government can decentralize the social optimum by a parental tax on newborns and a Pigouvian tax on pollutants. Private health care should not be taxed.

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Optimal Taxation with Endogenous Population Growth and the Risk of Environmental Disaster. In: Dynamic Economic Problems with Regime Switches. Series “Dynamic Modeling and Econometrics in Economics and Finance” No. 25. Springer Nature Switzerland AG 2021.

Abstract. This study considers a market economy where firms produce goods from labor and capital and households supply labor, rear children, save in capital, promote their members’ health and longevity by health care and derive utility from their consumption and children, without caring of their adult offspring. There is a risk that population growth and capital accumulation trigger a lethal environmental disaster. Optimal policy is solved by a game where the government is the leader and the representative household the follower. The solution yields precautionary taxes on both capital income and health care.

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Public Policy, Footloose Capital, and Union Influence. Review of International Economics 2020. Vol. 28 (4), 976-991.

Abstract. This document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.

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Emission Permit Trading with a Self-Interested Regulator. Environmental Economics and Policy Studies. 21 (2019): 183-196.

Abstract.  I examine the welfare effects of emission permit trading in an economy where the use of energy in production generates welfare-harming emissions, there is a regulator that sets industry-specific emission permits and the industries influence the regulator by paying political contributions. I show that policy with nontraded emission permits establishes aggregate production efficiency. Emission permit trading hampers efficiency and welfare by increasing the use of emitting inputs in dirty and decreasing that in clean industries.

DOI 10.1007/s10018-019-00236-8

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Optimal Taxation with Endogenous Fertility and Health-Damaging Emissions. IFAC PapersOnLine 51 (2018), issue 32, 79-83

Abstract.  Output is produced from labor and capital by technologies that differ in their emission intensity and relative capital intensity. Aggregate emissions decrease every individual’s health, but each individual can invest its own health. Population grows by the difference of fertility and exogenous mortality. Labor is used in production or child rearing. I construct a differential game where the benevolent government is a leader that determines taxes and subsidies, while the representative family is a follower that saves in capital and decides on its number of children. The main results are as follows. Without government intervention, population increases or decreases indefinitely. Capital should be taxed, if dirty technology, and subsidized, if clean technology is relatively capital intensive. Child rearing should be taxed, if dirty technology is relatively capital intensive or mildly labor intensive.

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(2017) Emission Permit Trading with Global Externality Problems. Tapio Palokangas, HECER, University of Helsinki.

Abstract.  I examine a set of heterogeneous countries where firms produce goods from emitting inputs and fixed resources. Emissions cause global pollution that harms everyone’s welfare. There is a benevolent international regulator that grants country-specific emission permits. It is shown that welfare decreases, if the countries are allowed to trade in emission permits. If the sellers of permits are on the average richer than the buyers, then the regulator grants too much, and if poorer, too little permits from the welfare point of view.

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LINK: First IIASA Summer Workshop on Green Growth Modeling
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(2017) Optimal Taxation,Endogenous Fertility and Emissions-Induced Mortality. Tapio Palokangas, HECER, University of Helsinki.

Abstract.  I examine optimal taxation in an economy where output is produced from labor and capital by technologies that differ in their emission intensity and relative demand for capital and labor. Families save in capital and determine fertility. Emissions increase, but public services (e.g. sanitation, medical care) decreases mortality. Solving the differential game between the social planner and the families leads to the following result. Only if dirty technology is capital intensive relative to clean technology, a wealth tax is optimal. Only if dirty technology is labor intensive enough relative to clean technology, a child-rearing subsidy is optimal. 

  • Paper presented at the International Workshop “Economic Growth, Macroeconomic Dynamics and Agents’ Heterogeneity” in the European University at St Petersburg, May 25-26, 2017.
  • Paper presented in IIASA, Laxenburg/Vienna, Austria, July 25, 2017.

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