Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time
2012, Social Choice and Welfare
Eric Bennett Rasmusen
One reason to call an activity a vice and suppress it is that it reduces a person's future happiness more than it increases his present happiness. Gruber & Koszegi (2001) show how a vice tax can increase a person's welfare in a model of multiple selves with hyperbolic preferences across time. An interself analogy of the compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing.
Rasmusen, Eric Bennett (2012), "Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time," Social Choice and Welfare, Vol. 38, No. 4, April, pp. 601-615.