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

Pidong Huang, Young Sik Kim, Manjong Lee

Research output: Contribution to journalArticle

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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