Monetization of Public Goods Provision: A possible solution for the free-rider problem

Author Name KOBAYASHI Keiichiro  (Senior Fellow, RIETI) /NAKAJIMA Tomoyuki  (KIER, Kyoto University)
Creation Date/NO. June 2008 08-E-019
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We consider a new method of public goods provision: monetization.

The government makes a particular public good the specie of money and commits itself to buy the public good at a predetermined nominal price and adjust money supply so that the ratio between the public good reserve and money supply equals a predetermined reserve ratio. In a two-country model, in which one country issues international currency and the other issues domestic currency, we show that if the government that issues the international currency adopts a monetization policy, it can attain both the optimal level of public goods provision and equal cost sharing for the public goods provision between the two countries by choosing the nominal price of the public good and the reserve ratio appropriately. In this case, the international free-rider problem is completely resolved.