The Korean Journal of Economic Studies
Estimation of Cigarette Demand Function and its Implication on the Cigarette Tax Policy
Byeongho Choe (Pusan National University), Keunjae Lee (Pusan National University)Year 2015Vol. 63No. 4
The objective of this paper is to figure out the desirable way of cigarettetaxation by investigating the effect of discontinuous increase in cigarette tax onsmoking reduction. We use a monthly data for cigarette consumption toestimate the cigarette demand function by employing explanatory variablessuch as cigarette price, income and non-tax regulation. We consider thepossible difference in the price elasticities of cigarette consumption between theperiods of with and without sudden price shock in the estimation. We alsoconsider the short-term consumption adjustments before and after a suddenincrease in cigarette price through tax increase. It is shown that there is nodifference between the effect of a sudden tax increase and that of a gradual andcontinuous tax increase on cigarette consumption. Especially, the price shockof a sudden tax increase on cigarette consumption disappears in a shortperiod. The results imply that a gradual and continuous increase of thecigarette tax at an appropriate rate is a good alternative for the cigarette pricingpolicy to avoid various costs of sudden tax increase and to reduce smoking.