June 6, 2016
Higher Cigarette Prices Work Better Than We Thought
Today we published two studies through the National Bureau of Economic Research that shed new light on how cigarette prices impact consumer demand for cigarettes. Both show that smokers not only respond to price changes, but do so even more than we thought. We took a close look at some of the factors that influence demand and found that increasing the cost per pack leads to larger reductions in smoking at higher price points.
This is the first research to examine how demand changes at different price levels (ranging from $2 to $10 per pack) and to account for the substantial differences in within-state prices. These more precise measures can help policy makers more accurately predict how cigarette tax increases will reduce cigarette consumption and change the amount of revenue generated.
For example, according to survey data, increasing cigarette prices by 10% reduces cigarette consumption by 3.1% on average. When we examined more closely, we found that demand dropped by 2.2% at $3 per pack and by 6.7% when the cost was $9 per pack. This illustrates how smokers become even more sensitive to price increases as prices get higher.
This means that in states where the cost of cigarettes is above the national average (like New York), a tax that raises the price of cigarettes by 10% will generate a relatively smaller increase in tobacco tax revenue as cigarette purchases decrease, but there would be a relatively greater public health impact because more people would smoke less or quit. The same tax increase in states where the cost of cigarettes is below the national average (like Virginia), would generate relatively more additional revenue, but have a relatively smaller public health impact.
The lead authors of the studies, John Tauras and Michael Pesko, work with Tobacconomics, which is led by Frank J. Chaloupka, director of the Health Policy Center at University of Illinois at Chicago. The research was funded by the National Cancer Institute State and County Tobacco Control (SCTC) Research Initiative.
See the full papers for more details: “The Effect of Cigarette Prices on Cigarette Sales: Exploring Heterogeneity in Price Elasticities at High and Low Prices” and “The Influence of Geography and Measurement in Estimating Cigarette Price Responsiveness.”