Time inconsistencies, paternalism, and drug consumption: a theory of "good" distortions

This paper studies a simple model of paternalistic pricing, in which one agent (the "mother") may modify the choices made by an other agent (the "son"), by changing his budget. set, either through prices or income. When preferences of both agents differ, changes in the price system faced by the son will distort his behavior; this distorsion is valued positively by the mother. This model first applies to time inconsistent preferences, where mother and son represent two instances of the same individual at different times. A second application is to merit goods, when the mother is interpreted as an informed government, and the son as a
misinformed agent. The mother (today's self) may optimally decide to restrict the son's (tomorrow's self) choice space by increasing some prices, which become a commitment device. Such a "demand for taxation" may exist when both disagreement between the two selves and price elasticity of demand are large enough. The theory is then illustrated by the case of a heavily taxed good: tobacco. Many surveys indicate that a significant proportion of smokers actually favour an increase in cigarette taxes, This "demand for taxation" can be interpreted as a way to correct the negative external effect to oneself, where price is used as a self-disciplining device for an individual who anticipates his changing preference". Under standard estimates for the elasticity of demand, the analysis shows that the current level of tobacco tax would be optimal (from this single commitment perspective) if smokers weight present events four times more than future events, revealing a very high "salience" parameter. Still from this comittment perspective, prohibition of a good is justified only when the elasticity of demand is large enough (in absolute terms), which may be more the case for heroin than for cocain. (Author's abstract)