Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach
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Using a standard Ramsey approach, we examine the optimalallocation of social cost for an electronic payment system in thecontext of a dynamic general equilibrium model. The benevolent governmentprovides electronic payment services and allocates relevant socialcost 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 distortionaryconsumption taxation. It also enhances the economy of scale in theuse of electronic payment technology, reducing per transaction costof electronic payment. Finally, it saves the cost of withdrawing andcarrying around cash by reducing the frequency of cash trades. Allthese channels together imply optimality of the unity tax rate onlabor.
Abstract
Using a standard Ramsey approach, we examine the optimalallocation of social cost for an electronic payment system in thecontext of a dynamic general equilibrium model. The benevolent governmentprovides electronic payment services and allocates relevant socialcost 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 distortionaryconsumption taxation. It also enhances the economy of scale in theuse of electronic payment technology, reducing per transaction costof electronic payment. Finally, it saves the cost of withdrawing andcarrying around cash by reducing the frequency of cash trades. Allthese channels together imply optimality of the unity tax rate onlabor.
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