Internalities and Paternalism : Applying the Compensation Criterion to Multiple Selves Across Time

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. The puzzles that intrapersonal altruism raises, however, lend support to using the "Marshallian" wealth maximization criterion of Friedman (1988) instead of the Kaldor-Hicks criterion