Optimal tax rules and addictive consumption

This paper studies implementation of the social optimum in a model of addictive consumption. We consider corrective taxes that address inefficiencies due to negative externalities, imperfect competition, and self-control problems. Our setup allows us to evaluate how such taxes are affected by (i) market power and (ii) a requirement for implementation to be time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.