Taxing and Regulating Vices

We study the optimal taxation and regulation of sin goods – goods that are enjoyable to consume but also create future negative health consequences – within a setting in which individuals are time‐inconsistent (and thus consume too much), regulation makes the consumption of sin goods less pleasurable, and taxation involves administrative and compliance costs. In contrast to previous literature, we find that regulation can be beneficial even when corrective taxes are available and individuals are homogeneous. Moreover, despite the inefficiencies associated with the use of both instruments, the consumption of the sin good might fall short of the first best. The results are robust to consumers’ heterogeneity.