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Monetization of Public Goods Provision: A possible solution for the free-rider problem

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  • KOBAYASHI Keiichiro
  • NAKAJIMA Tomoyuki

Abstract

We consider a new method of public goods provision: monetization. The government makes a particular public good the specie of money and commits itself to buy the public good at a predetermined nominal price and adjust money supply so that the ratio between the public good reserve and money supply equals a predetermined reserve ratio. In a two-country model, in which one country issues international currency and the other issues domestic currency, we show that if the government that issues the international currency adopts a monetization policy, it can attain both the optimal level of public goods provision and equal cost sharing for the public goods provision between the two countries by choosing the nominal price of the public good and the reserve ratio appropriately. In this case, the international free-rider problem is completely resolved.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 08019.

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Length: 13 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:eti:dpaper:08019

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  1. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March.
  2. Stavins, Robert & Barrett, Scott & Aldy, Joseph, 2003. "13 + 1: A Comparison of Global Climate Change Policy Architectures," Discussion Papers dp-03-26, Resources For the Future.
  3. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. KOBAYASHI Keiichiro, 2008. "Emissions Standard System: A monetary regime for provision of global public goods," Discussion papers 08004, Research Institute of Economy, Trade and Industry (RIETI).
  5. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  6. Milton Friedman, 1951. "Commodity-Reserve Currency," Journal of Political Economy, University of Chicago Press, vol. 59, pages 203.
  7. U. Sankar, 2008. "Global Public Goods," Trade Working Papers 22510, East Asian Bureau of Economic Research.
  8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
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