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Last twinges from the coffin

Business Week continues to run an interesting series of commentaries on the US tobacco industry. About 17.5% of Americans aged 15 years plus smoked in 2004 about the same as Australia’s 17.7%. America’s smoking has declined rapidly in recent years because of much higher cigarette prices. One interesting aspect is that, while smoking is definitely on the nose in many parts of the world, US tobacco stocks still look strong – record numbers of fags are still be exported.

In California a remarkable natural experiment that looks like proceeding is a massive $2-60 per pack increase in the price of a packet of cigarettes. Prop 86 would bring the price to $6-55US or about $8-33Australian – about the price of a packet of 20 fags here. Taxes on cigarettes in the US are levied by the states and California has followed a number of states with markedly higher taxes. In all cases there has been a huge effort by the big tobacco companies to prevent the tax increases.

In California the price increase is about 65% and the forecast demand elasticity cited in the Business Week article is around -0.4 for adults and -0.65 for youth. (This youth elasticity seems much too high as World Bank estimates are closer to -1.6). If you can apply these elasticities to such a large price increase the forecast reduction in adult tobacco demands as a consequence of this change would be about a 26% reduction in smoking by adults and a 42% reduction among youth. Moreover demand is seen as inelastic so revenue from tobacco will increase by about $2 billion along with a $126.5 billion reduction in health costs.

The demand effects are unlikely to be this great as cigarettes can be smuggled in from neighboring states where prices are lower and there remains the problem of illegal supply. But the reductions will plausibly be huge if Prop 86 goes through – no wonder the cancer vendors are getting uppity – one half-true criticism of Prop 86 is that while smoking is bad for you so is levying hefty taxes on the poor and the ignorant.

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