Tobacco Tax Reform and Demand-Switching Effects Between the Licit and Illicit Markets in Brazil [Working Paper Series]

This Working Paper was written by Universidade Católica Brasília (UCB) in Brazil. The working paper examines cigarette price policies and the own-price and cross-price elasticities of licit and illicit cigarettes. The current minimum legal price of BRL 5.00 has not been adjusted since 2016 and is no longer a useful tool to distinguish between the licit and illicit market. Cigarettes are sold at similar, very low prices in both markets. The researchers find that increasing the price of licit cigarettes by 10% would reduce consumption by 4.12%, without causing a demand-switching effect towards the illicit market. At the same time, a 10% increase in the price of illicit cigarettes would reduce consumption by 2.53%, while increasing licit cigarette consumption by between 0.76% and 1.46%. These findings suggest that some smokers of illicit cigarettes would switch to the licit market in response to a price increase, while smokers of licit cigarettes would not switch to the illicit market following a price increase. The working paper concludes with recommendations for effective tobacco tax policies that would reduce consumption and raise revenues without an uptick in illicit cigarette consumption. 

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Two Policy Briefs based on the working paper can be found here and here.