Analysis of Cigarette Demand in Argentina: The Impact of Price Changes on Consumption and Government Revenues

Objective: To estimate cigarette demand and to simulate a tax policy targeted to reduce tobacco consumption.

Materials and Methods: Demand was estimated using a vector error correction model. Simulation exercises present the impact of a tax increase on consumption and revenues.

Results: Changes in real income and the real price of cigarettes affect the demand for cigarettes in Argentina. The long term price elasticity is 0.279 (a 10% increase in real prices reduces cigarette consumption by 2.79% per quarter) and the long term income elasticity is 0.411 (a 10% increase in real income raises consumption by 4.11% per quarter). Even in a conservative scenario, imulations show that increasing the price of cigarettes by 100% using excise taxes would maximize revenues and reduce cigarette consumption.

Conclusion: There is sufficient room to increase taxes, reducing cigarette consumption, while still increasing tax revenues.