Optimal allocation of social cost for electronic payment system: A Ramsey approach

Pidong Huang, Young Sik Kim, Manjong Lee

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)

    Abstract

    Using a standard Ramsey approach, we examine the optimal allocation of social cost for an electronic payment system in the context of a dynamic general equilibrium model. The benevolent government provides electronic payment services and allocates 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 because of the distortionary consumption taxation. It also enhances the 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.

    Original languageEnglish
    Pages (from-to)31-52
    Number of pages22
    JournalSeoul Journal of Economics
    Volume28
    Issue number1
    Publication statusPublished - 2015

    Keywords

    • Cash
    • Electronic payment cost
    • Ramsey problem

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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