Tobacco Taxes Work! Consumer Responses to Cigarette Price Increases- Evidence from Think Tanks in Asia
Five years ago, we began partnering with think tanks in low- and middle-income countries (LMICs) as a part of the Think Tanks Project to produce evidence on the economics of tobacco taxation. The research produced under these partnerships is guided by six research competencies (shown below). Each competency asks a question which is relevant for current policy discussions around the globe.
We begin this blog series with the first research core competency and highlight evidence from Asia on the topic. Each coming blog will focus on a competency in Asia, Latin America, or Southeastern Europe.
|#||Research Core Competency Questions|
|1||How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies?|
|2||How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes?|
|3||How would the fiscal policy affect the poor?|
|4||What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs?|
|5||How would the fiscal policy affect employment and economic growth?|
|6||To what extent is the fiscal policy related to illicit trade of tobacco products?|
To address Research Core Competency 1, our think tank partners in Asia estimated the elasticities of demand for cigarettes and sometimes other tobacco products. These estimates are a measure of how responsive smokers are to price. Often, they are calculated using household budget survey data, as outlined in A Toolkit on Using Household Expenditure Surveys for Research in the Economics of Tobacco Control (stay tuned for an updated version, coming later this year). Findings from around the world show that consumers do smoke less or quit or do not start in response to price increases. Due to the addictive nature of smoking, though, the demand for tobacco products is typically inelastic. Consumers reduce consumption less than proportionately to increases in price. As such, policy makers can use the demand elasticities produced by economists to set effective tax rates which reduce consumption while raising additional tax revenue.
We partnered with six think tanks in the region: BRAC Institute of Governance and Development (BIGD), ARK Foundation, and Institute of Health Economics (IHE) in Bangladesh; Center for Indonesia's Strategic Development Initiatives (CISDI) in Indonesia, Pakistan Institute of Development Economics (PIDE) in Pakistan, and Development and Policies Research Center (DEPOCEN) in Vietnam to estimate the demand elasticities for cigarettes and other tobacco products. The think tanks applied their findings to develop evidence-based recommendations for respective governments.
The price elasticity of demand estimates for cigarettes ranged from -0.71 in Bangladesh to -1.06 in Pakistan (view all of the elasticities produced here). Our think tank partners also analyzed differences in elasticities by region, age groups, production segment, and brands. In Bangladesh, both studies found that rural households were more responsive to price than urban households, although this difference was only statistically significant in BIGD’s study, and not in ARK Foundation’s. IHE estimated the price elasticities of low- and high-price cigarettes. Researchers found that a 10% increase in the price would result in a 1.68% decrease in the consumption of low-price brands, compared to a 2.51% decrease for high-price cigarettes. CISDI’s research showed that the demand for kreteks (cigarettes made with a combination of tobacco and cloves) in Indonesia was negative and elastic, while the demand for white cigarettes was inelastic in Indonesia. The results from PIDE in Pakistan found that demand was negative and elastic among rural households (-1.16), but statistically insignificant among urban households. In Vietnam, DEPOCEN estimated average own-price elasticities for cigarettes by price segment and found that consumers of higher-priced brands were more responsive to price compared to consumers of lower-priced brands.
Think tanks also examined price responsiveness for other tobacco products. In Bangladesh, BIGD concluded that the demand for biris (a cigarette made from unprocessed tobacco wrapped in leaves typically found in South Asia) (-1.34) was more elastic compared to cigarettes (-1.03), while the demand for smokeless tobacco (usually a mixture of powdered tobacco and other ingredients such as slaked lime) (SLT) (-0.30) was inelastic. Similarly, in Pakistan the demand for chewed tobacco (-0.55) was inelastic.
The studies from the region paint a clear picture: increasing the price of tobacco products using excise taxes decreases the demand for these products. Still, the reduction is often less than proportional to the change in price. As a result, tobacco taxes are effective at reducing tobacco use, while continuing to raise additional revenues for governments.