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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.

Suggested Citation

  • KOBAYASHI Keiichiro & NAKAJIMA Tomoyuki, 2008. "Monetization of Public Goods Provision: A possible solution for the free-rider problem," Discussion papers 08019, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:08019
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    References listed on IDEAS

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    1. U. Sankar, 2008. "Global Public Goods," Trade Working Papers 22510, East Asian Bureau of Economic Research.
    2. 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).
    3. Milton Friedman, 1951. "Commodity-Reserve Currency," Journal of Political Economy, University of Chicago Press, vol. 59, pages 203-203.
    4. 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.
    5. 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.
    6. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    7. 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.
    8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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