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Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach

Author

Listed:
  • Pidong Huang

    () (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Young Sik Kim

    () (Department of Economics, Seoul National University, Seoul, Republic of Korea)

  • Manjong Lee

    () (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

Using a standard Ramsey approach, we examine an optimal allocation of the social cost for electronic payment system in the context of a dynamic general equilibrium model where money is essential. The benevolent government provides electronic payment services and allocates the relevant social cost through taxation on the beneficiaries¡¯ labor and consumption. A higher tax rate on labor yields the following desirable allocations. First, it implies a lower welfare loss due to the distortionary consumption taxation. It also enhances economy of scale in the use of electronic payment technology, reducing per transaction cost of electronic payment. Finally, it saves the cost of withdrawing and carrying around cash by reducing the frequency of cash trades. All these channels together imply optimality of the unity tax rate on labor.

Suggested Citation

  • Pidong Huang & Young Sik Kim & Manjong Lee, 2014. "Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach," Discussion Paper Series 1402, Institute of Economic Research, Korea University.
  • Handle: RePEc:iek:wpaper:1402
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1402.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pidong Huang & Manjong Lee, 2015. "Coordination on Use of Non-deferred Electronic Payment Instruments," Korean Economic Review, Korean Economic Association, vol. 31, pages 5-24.

    More about this item

    Keywords

    cash; electronic payment; social cost; Ramsey problem;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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