Imposing Taxes on Cigarrettes May Be Beneficial

Cigarettes are not like normal goods since they for most of their users are addictions. The demand curve is therefore close to inelastic (See figure 1 and Perucic). This is again because customers are addicted to cigarettes and nicotine and will pay the extra money to continue to smoke them. Furthermore, cigarettes do not have many close substitutes that people can use instead (Perucic). So when the government imposes a tax on cigarettes the producer will be able to pass nearly all of the cost from the tax on to the consumer, this is due to the inelastic demand on cigarettes and the quantity demanded only decreases a small amount. The tax burden for the consumers in the case of cigarettes in very high and the tax burden for producers is very little (See figure 2).

Over 100 published international studies indicate almost without exception a statistically correlation between price and consumption of tobacco. They show that consumption decreases with increasing prices and consumption increases with decreasing prices. The price/consumption relationship is strongest in the socially weaker sections of the population; regardless of if the social status is measured by income or education (Response). Moreover, it seems that the relationship is stronger among the very young (<18 years) and decreases up to approx. 30 years of age (Response). This difference is mainly due to that young people's decisions to begin or cease smoking is highly price sensitive (Response).

How to measure and express the relationship between price and consumption of tobacco?

The relationship between price and consumption of a product is often expressed in a price elasticity. The price elasticity measures the ratio of the relative consumption change (in an approp...

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