microeconomicsSay a person, Angie. She has a preference to be a paid sugar baby by a handsome tall multi millionaire that already have 50 beautiful girl friends and consume a non addictive drug like ecstasy.
And then we have Bob. He thinks doing that is bad for Angie and prohibit prostitution and ecstasy.
How do economist resolve this?
So what’s the standard economy theories on cases like this?
Laws against consensual crimes (like prostitution) are often justified by asserting that some choices are so bad that they must be prohibited.
However, we (economists) assume that people are rational and that they endeavor to maximize utility. Hence, taking away a choice from a person will never make them better off.
I’ve heard that in game theory it’s not always the case but in decision theory it’s always the case.
How does limiting people’s (legal) choices benefit them?
What do economists do to reconcile prohibition of non addictive drugs (like ecstasy) with their normal homoeconomicus assumption.
There are two separate issues here, so I will give you two answers.
The first is that some of the activities you mention are not really consensual, even if it appears to be that way. Prostitution, especially in developing countries, is accompanied by a lot of abuse, exploitation, trafficking and forced abduction. This process aims to coerce people into accepting a life of prostitution by systematically closing other options available to them.
Indeed, it is precisely because coercive and downright immoral methods are used by traffickers to force young boys and girls into prostitution that prostitution should be legalised. Legalisation of the trade would allow authorities to better monitor the activity and enable the exploited to seek justice more easily. Economists who support legalisation of prostitution or marijuana usually have such an argument in mind.
The second deals more directly with economics proper. Suppose we take a truly consensual activity - smoking, for example. This activity has two economically relevant features. (a) Smoking is addictive, leading to time-inconsistent behaviour, and (b) the health costs associated with smoking are borne by society as a whole, so it has negative externalities.
The problem of addiction and time-inconsistency in (a) is studied extensively in decision theory, notably by Gul and Pesendorfer. In a nutshell, their agent takes as given the fact that s/he is unable to stick to past plans (due to addiction or temptation) and then rationally responds to this problem by anticipating future time-inconsistency issues. Thus, it is possible that rational people have a strict preference for a smaller choice set in order to avoid being tempted. The key thing here is that the content of preferences has changed, but the way of making choices given that content is still “rational” in the sense of acting with foresight, unlimited computational and reasoning power, no mistakes, etc.
(b) is not strictly relevant to your question, but I want to point out that even if limiting people’s (legal) choices does not benefit them, it might still be the efficient thing to do from the point of view of society as a whole, because of a standard externalities argument.
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