Estimation of Own-Price and Expenditure Elasticities of Cigarette Demand by Income Groups (Report)

This Report was written by Institute of Economic Research SAS in Slovakia. The report assesses the price and expenditure elasticities of demand for cigarettes by income group. The study uses two different methodologies in these estimates: the two-part model (2PM) and the quadratic almost-ideal demand system (QUAIDS) approach, both of which yielded similar results. Following a 10% increase in cigarette prices, low-, middle-, and high-income households would decrease consumption by 9.7%, 13.9%, and 3.4%, respectively. The authors, note, however, that the elastic demand among the middle-income group may be partially due to the growing popularity of e-cigarettes and other tobacco products. On the other hand, a 10% increase in expenditure, used as a proxy for income, would increase consumption by 10.5%, 17.5%, and 14.8%, respectively. Using these elasticities, the researchers simulate the impact of a 10% increase in cigarette taxes. This would reduce total cigarette consumption by 1.7% (or 313.6 million packs), while raising an additional 6.8% in tax revenues. The low- and middle-income groups would reduce consumption most, at 3.3% and 4.1%, respectively, while tax burden would fall more on the high-income group. The report concludes with recommendations for policy makers to raise tobacco taxes to reduce consumption, while continuing to raise revenues.

A Policy Brief based on the report can be found here.