Working Paper: NBER ID: w22251
Authors: John A. Tauras; Michael F. Pesko; Jidong Huang; Frank J. Chaloupka; Matthew C. Farrelly
Abstract: Numerous studies have examined the effect of cigarette prices on cigarette consumption. These studies either evaluate the price elasticity of demand for each observation and report the average price elasticity across all observations or report the price elasticity of demand at the mean of the price variable. Policy makers rely on these average price elasticity estimates for public health and revenue generation purposes. The use of an average price elasticity may yield misleading predictions given the substantial variation in cigarette prices between states. This research is the first econometric study to examine the price elasticity of cigarette demand at different price levels. We use aggregate state-level data for years 1991 – 2012 and employ generalized linear models with log link and gamma distribution to estimate cigarette demand equations. We find that the absolute value of the price elasticity of demand monotonically increases with price. The findings from this study will be valuable to policymakers contemplating the use of cigarette excise taxes to reduce cigarette consumption or to generate revenue.
Keywords: Cigarette Prices; Cigarette Sales; Price Elasticity
JEL Codes: I12; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in cigarette prices (D49) | Decrease in cigarette sales (F61) |
| Higher prices (D49) | Greater reductions in consumption (D12) |
| Price of $2 per pack (D41) | Price elasticity of demand of 0.34 (D12) |
| Price of $10 per pack (D41) | Price elasticity of demand of 1.70 (D12) |
| Inclusion of cross-border sales controls and demographic variables (J11) | Affects elasticity estimates (C51) |