Optimal Paternalistic Regulation of Markets

Julien Combe and Yves Le Yaouanq

No 22005, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Many markets are regulated for paternalistic reasons. We develop a mechanism-design framework to derive the optimal policy mix between price regulation and quantity controls. A budget-constrained planner allocates trade between privately informed buyers and sellers while disagreeing with their valuations. When the planner’s valuations preserve the ranking of agents, price instruments (e.g., sin taxes) are optimal. When the planner instead believes that a high willingness to trade indicates a bias, optimal regulation can restrict quantities or even prohibit transactions. De-biasing interventions offer two benefits beyond economic regulation: improving selection into markets and, for virtuous goods, raising the volume of trade.

Keywords: Paternalism; Mechanism design; Market regulation; Nudge; Rationing; Sin tax (search for similar items in EconPapers)
JEL-codes: D47 D82 D90 (search for similar items in EconPapers)
Date: 2026-09
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