Cigarette Tax and Price Gaps Between Low- and High-Price Tiers Must be Closed for Effective Tobacco Taxation in Bangladesh

This Policy Brief was written by the Institute of Health Economics (IHE) in Bangladesh. The study examined the impact of the tiered price and tax system by estimating own- and cross-price elasticities of low- and high-priced brands, as well as income elasticities of cigarette consumption by price tier. Researchers find that the total elasticity (smoking prevalence and intensity) for low-price cigarettes is -0.1678. The own-price elasticity of the smoking intensity of high-price cigarette brands is -0.2512, while the cross-price elasticity of low-price cigarette consumption with respect to high-price brand prices is 0.2643. This implies that increasing the price of high-price cigarettes by 10% would increase consumption of low-price cigarettes by 2.643%, suggesting that smokers may switch to cheaper brands when faced with price increases. Therefore, increasing the price of cigarettes in the low-tier is critical to reducing tobacco use, especially since low-price brands dominate the market. On the other hand, as incomes rise, smokers are likely switching from low- to high-price brands: the total income elasticity for low-price cigarettes is -0.1370, while the total elasticity for high-price cigarettes is 1.4608. The policy brief concludes with a set of recommendations for policy makers, highlighting the importance of increasing the price of the low-price cigarettes and reducing the price differential between tiers so that all cigarettes are taxed at the same rate.

A corresponding Working Paper can be found here.