Tobacco Taxes Work! Consumer Responses to Cigarette Price Increases- Evidence from Think Tanks in Southeastern Europe

In low- and middle-income countries (LMICs) around the world, governments are failing to reap the benefits of effective tobacco taxation. Under the Think Tanks Project, Tobacconomics has been partnering with think tanks since 2017 to produce the economic evidence needed to inform effective policies to reap public health and fiscal benefits of well-designed tobacco taxes. The six research core competencies (shown below) provide a broad framework for the research.

This blog is part of a series where we highlight the regional evidence from Asia, Latin America, and Southeastern Europe under each of the research core competencies. Below, we focus on the first research core competency and the relevant findings from our partners in 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?

Economists in the region estimated the responsiveness of consumers to price changes, or the elasticity of demand, using household budget survey data, as outlined in A Toolkit on Using Household Expenditure Surveys for Research in the Economics of Tobacco Control (updated version coming later this year). Although cigarettes are addictive in nature, evidence from around the world shows that smokers still reduce consumption when faced with significant price increases. This reduction is typically less than proportional to the increase in price, which suggests that cigarettes are an inelastic good. As a result, policy makers can use cigarette excise tax increases to meet both public health and revenue goals.

In Southeastern Europe, we partnered with seven think tanks to estimate the elasticities of demand for cigarettes using multiple methods. We worked with Development Solutions Associates (DSA) in Albania, University of Banja Luka (UBL) in Bosnia and Herzegovina, University of Split (Uni of Split) in Croatia, Centre for Political Courage (CPC) in Kosovo, Analytica in Macedonia, Institute for Socio-Economic Analysis (ISEA) in Montenegro, and Institute of Economic Sciences (IES) in Serbia.

Think tanks used a combination of time series data and household survey data to show that the demand for cigarettes in each of the countries was negative and inelastic (view all of the elasticity estimates here). The only exception was Bosnia and Herzegovina, where a microdata analysis found that a 10% increase in the price of cigarettes would reduce demand by 13.7%, and Croatia where household survey data showed that 10% increase would reduce demand by 10.7%. In Montenegro, ISEA estimated that the price elasticity for cigarettes was between -0.80 and -0.62 using results from a household survey, while IES found that the elasticity in Serbia was -0.64 and DSA in Albania concluded that elasticity was -0.57. In Macedonia, household survey data was not available, so time series data was used to conclude that a 10% increase in the price of cigarettes would reduce demand by around 4%. Consumers in Kosovo were the least responsive to price, with an elasticity of -0.29. The findings from think tanks also showed that consumers were more responsive to price in the long-run compared to the short-run. Across the region, IES estimated that the demand for manufactured cigarettes was more elastic than the demand for roll-your-own tobacco (between -0.44 and -0.61 and between -0.36 and -0.42, respectively).

Across Southeastern Europe, smokers would reduce consumption in response to an increase in cigarette tax rates. While this would improve public health, it would also raise additional tax revenue in most of the countries studied. Policy makers have an opportunity to reap these benefits by implementing evidence-based excise tax policies.

If you missed our last two blogs on Asia and Latin America, be sure to check them out, and stay tuned for a discussion of Research Core Competency 2!