Saturday, March 13, 2010

More on Demand Elasticity of Cigarettes---the Story gets BETTER!!!!

Although it is commonly thought that goods that promote an addiction are relatively price inelastic, meaning consumers are not significantly responsive to changes in quantity demanded when price changes, we have to remember that the percentage of income allocated to the good is also a determinant of elasticity.  The higher the percentage of income allocated to a good the more elastic demand tends be when price changes.  The following study tests the price elasticity of demand in developing (read that "poor(er) ) countries and hypothesizes that a 10% increase in the price of cigarettes (through a tax, I assume) would result in an 18.3% decrease in quantity demanded of cigarettes (Price elasticity of demand is %change in Quatity Demanded divided by %change in price--if result is less than 1 the good is relatively demand inelastic, if greater than 1 the good is relatively demand elastic). This suggests that the quantity demanded for cigarettes in the developing world is price elastic, presumably because of lower overall incomes.  Because Americans have more income available (even the young AND the poor), hence cigarettes purchases are a smaller part of an individual budget to purchase cigarettes, I believe this would not be the case here.  Demand would be more price inelastic...Any thoughts??

From VOX: Do higher cigarette prices deter smoking? Evidence from developing nations

Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%.


Reducing tobacco use has been an important issue for policymakers ever since the US Surgeon General’s 1964 report on the adverse health effects of tobacco. Tobacco is now established as a leading cause of preventable death worldwide and is expected to claim nearly a billion lives in the 21st century (WHO 2008).

Youth smoking in developing nations

The majority of the tobacco public health burden will be carried by developing countries, due to the unfortunate combination of increasing consumption and health system inadequacy. Of particular concern in developing countries is youth smoking, which can start at very young age and is the primary way of establishing adult smoking habits.

Although tobacco use is a major public health problem in lower-income countries, most of the evidence on what determines smoking comes from a few industrialised countries, primarily the US. There is a wealth of research on the impact of US cigarette prices or taxes, most of which agrees that taxes/prices can be used effectively to influence smoking decisions.

However, many studies have difficulty in claiming a causal price effect due to inability to control for variation in state characteristics. The most recent research on US youth smoking employs better identification techniques (DeCicca et al. 2008, Carpenter and Cook 2008, and Tauras et al. 2005), but the results have been mixed with regards to the impact of price. This hinders extrapolation of US-based results to other countries.

Even if uniform evidence on US price effects were available, US results may not be easily generalised to other countries due to differences in income, cultural environment, and individual behaviour.

New evidence from 20 developing nations

In recent work, co-authors and I claim that policymakers in lower-income countries would be able to reduce youth cigarette consumption through tax policies that increase the price of cigarettes (Kostova et al. 2010). Using individual-level data from 20 developing countries, we estimate that the price elasticity of cigarette demand among youth is -1.83.

We focus on youth (the average age in our sample is 14 years) since smoking habits are established primarily in adolescence, making this the optimal age for intervention. Our data come from the Global Youth Tobacco Survey (GYTS), combined with cigarette price data from the Economist Intelligence Unit Cost of Living Survey.

Our total price elasticity estimate can be decomposed into two parts:

•the price elasticity of smoking participation (-0.63), and

•the price elasticity of consumption intensity (-1.2).

The first represents the effect of price on smoking prevalence while the second represents the effect of price on the number of cigarettes consumed by smokers. We estimate that a 10% increase in price would reduce youth smoking rates by 6.3%. We also estimate that a 10% increase in price would reduce the average number of cigarettes consumed by young smokers by 12%. Overall, a 10% increase in cigarette price would reduce youth cigarette demand by 18.3%.

The causal effect of cigarette prices on smoking in our analysis is identified by:

•using country fixed effects, and

•including a measure of local anti-smoking sentiment.

These measures control for unobserved country characteristics which could affect both price and demand, and could potentially bias the price estimate. We further reduce unobserved country heterogeneity by controlling for confounding environmental factors such as the prevalence of cigarette advertising, anti-tobacco media outreach, and compliance with youth access restrictions.

Conclusion: Higher prices reduce youth smoking in developing nations

Our results suggest that price is a significant determinant of cigarette demand among youth in lower-income countries, and the price may be used as a policy tool to curb smoking in the developing world.
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