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

Authors
Huang, PidongKim, Young SikLee, Manjong
Issue Date
2015
Publisher
SEOUL NATL UNIV, INST ECONOMIC RESEARCH
Keywords
Cash; Electronic payment cost; Ramsey problem
Citation
SEOUL JOURNAL OF ECONOMICS, v.28, no.1, pp.31 - 52
Indexed
SCOPUS
KCI
Journal Title
SEOUL JOURNAL OF ECONOMICS
Volume
28
Number
1
Start Page
31
End Page
52
URI
https://scholar.korea.ac.kr/handle/2021.sw.korea/96407
ISSN
1225-0279
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.
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