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

Pidong Huang (), Young Sik Kim () and Manjong Lee
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Young Sik Kim: Department of Economics, Seoul National University, Seoul, Republic of Korea

No 1402, Discussion Paper Series from Institute of Economic Research, Korea University

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.

Keywords: cash; electronic payment; social cost; Ramsey problem (search for similar items in EconPapers)
JEL-codes: E40 E60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2014
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