Cash Is Burning a Hole in Society’s Pocket: An Analysis of the Social Costs of Payment Instruments in the United States

Abstract

This study analyses the costs and benefits associated with conducting cash and credit card transactions in the United States. By using a cost-benefit analysis, the net social costs of conducting transactions with cash and credit cards are calculated. The cost-benefit analysis is conducted once to find the differences in the net social costs of using both payment instruments, and a second time to find the net social cost of replacing a cash transaction with a credit card transaction. Following the cost-benefit analysis, this study examines the relationship between consumer’s ratings of payment instruments and how altering those ratings can affect consumer’s payment habits. This study finds that credit card transactions have a lower net social cost than cash transactions, that replacing one cash transaction with one credit card transaction would generate a positive net social benefit, and by altering consumer’s ratings of credit cards relative to cash, public policies that target consumers perceptions of security, cost, convenience, ease of setup, and record keeping qualities would have a significant effect on consumers payment habits and generate a net social benefit.