Real price increases (primarily through increased taxation at the state and/or federal level) have been shown to depress demand for cigarettes.(3) Taxation increases are recommended as a component of a comprehensive smoking control program.(26) Increasing cigarette excise taxes and then ensuring that higher real tax burdens are maintained over time, could eventually result in much lower smoking rates among the community.(1,2,3,4)
Unless otherwise noted, the source for this sub-section is reference 1.
Elasticity of price refers to the effect of price change on consumption patterns. It is generally held that increasing prices leads to a decline in demand; the extent to which demand alters is dependent on the nature of the commodity in question. Tobacco is considered to have relatively low price elasticity, in that most people who use tobacco are addicted to the product. There being no alternative product available which will deliver the same effects, smokers are prepared to pay increased prices to some extent in order to maintain their access to tobacco.
Response to price increases in tobacco products differs between population sub groups. Children and teenagers, who as a population tend to have least disposable income, and are likely to be least addicted to tobacco, show the most marked drop in consumption when tobacco prices rise. Australian research has confirmed that 'affordability' is one of the factors in influencing children's decisions to smoke.(5) Price elasticity in this group has been estimated, most recently at -.87 (6); -1.51 among boys and -.32 among girls. This means that for every 10% increase in price, a 8.7% decline in demand would be expected. As smokers become older and more addicted to tobacco, they respond less to price increases. Overall adult population elasticity is estimated at -0.42, a price increase of 10% reducing overall demand by 4.2% (Table 7.1).(3)
Table 7.1 also shows the elasticity in the 'participation' rate of smokers, that is, the decline in number of smokers in each age group, and the reduction in quantity smoked per smoker, in response to a 10% price rise. It appears that most of the decline in demand for tobacco due to price rises occurs due to reductions in smoking prevalence, rather than in consumption by smokers.
Because population consumption and prevalence patterns are dominated by adult behaviour, and adults are less affected by price increases than young people, the immediate overall effects of price rises are likely to be modest. Where increased taxes have their greatest impact is as a deterrent to those at the start or early into their smoking career, thereby introducing young cohorts with lower smoking rates. Provided the tax increases were maintained in real terms, this could continue to discourage successive cohorts of children from taking up smoking. In time, this would significantly affect overall population patterns of smoking.