Is it always better to internalize externalities?

A friend of mine recently set up an account with stickK to help him quit smoking.  Every time he falls of the bandwagon, stickK makes a donation, billed to his credit card, to the Republican National Committee-- a cause my friend thinks is decidedly UNworthy.

While I lauded his ambition to quit smoking, my first reaction to stickK was mixed.  With stickK, every time my friend smokes a cigarette, the negative externalities are doubled. (Or not, depending on your political leanings.  But you get the idea.)  For my friend though, the idea of money being donated to a cause he hates is much more powerful than simply deducting money from his account.

Economists tend to be enamored with finding ways to internalize externalities, that is, shift the burden (or benefit) of a behavior back to the person engaging in that behavior.  In some cases, though, knowledge that the externality exists may be sufficient, if the person's propensity for guilt is high enough.  Most people don't like to feel like they are burdening others, and they certainly don't want to be seen as causing a burden to others.  However, if the negative consequences of an action are completely internalized, the people can justify choices they know aren't welfare maximizing as harming no one but themselves. 

As a side note, some of you may be wondering how stickK knows whether my friend smokes or not.  StickK itself relies on self-reporting, which is obviously not ideal.  However, my friend's boss will be administering weekly drug tests for him, which should be an effective enforcement mechanism, despite being incredibly awkward.