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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 28, No. 1, pp.31-52
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2015
Received 22 Oct 2014 Revised 30 Jan 2015 Accepted 02 Feb 2015

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

Pidong Huang ; Young Sik Kim ; Manjong Lee
Assistant Professor, Department of Economics, Korea University, Tel: 82-2-3290-5133, Fax: 82-2-3290-2200 pidonghuang@korea.ac.kr
Professor, Department of Economics, Seoul National University, Tel: 82-2-880-6387, Fax: 82-2-886-4231 kimy@snu.ac.kr
Associate Professor, Department of Economics, Korea University, Tel: 82-2-3290-2223, Fax: 82-2-3290-2200 manjong@korea.ac.kr

JEL Classification: E40, E60

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.

Keywords:

Cash, Electronic payment cost, Ramsey problem

Acknowledgments

We are grateful to anonymous referees for their valuable suggestions. Manjong Lee (corresponding author) acknowledges the financial support from the Korea University (Grant No. K1420811) and the National Research Foundation of Korea funded by the Korean government (NRF-362-2008-1-A00001). Young Sik Kim gratefully acknowledges the financial support from the Institute of Economic Research of Seoul National University. The usual disclaimer applies.

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