There are several explanations for governments worldwide to continue increasing taxation of tobacco products. The main reasons are related with an economic and public health point of view.
Regarding the public health perspective, policy makers implemented higher cigarette taxes to save a substantial number of lives and reduce health care costs associated with smoking.
Secondly, taxation generates a relative stable and sustained source of revenues for governments. Also, cigarette excise taxes are inexpensive to implement and administratively easy to apply. States collected more than $17 billion in cigarette excise taxes in 2012.
As we can see by the graphs below, there is a negative relationship between cigarette consumption and cigarette taxes over the last years. While the price of tobacco growth the consumption/sales decrease and the government revenues arise.
To understand how taxation policies work, it is necessary to clarify the concept of elasticity.
The price elasticity of tobacco demand measures the responsiveness of cigarette consumption to changes in the price of cigarettes.
The demand for tobacco is inelastic, it means that people will not easily change their behavior regarding increases in price. However, as we can see by the graphs the demand for cigarettes has been decreasing since the 80’s and it could be related with several factors, for instead health issues, income effect and substitution effect.
The elasticity may not be always constant and may change between different ages.
The graph above results from study analysis made by Kevin Callison and Robert Kaestner (2014) and shows the effect of large cigarette tax increases on the smoking behavior of adults ages 18–74.
The elasticity is – 0.015, which is very small and not statistically significant. It indicates that a 1 percent increase in the cigarette tax would drop smoking among adults by 1.5 percent.
As we can perceive by the graph above, the elasticity change across the different ages.
For ages between 18-34 the elasticity is 0.040, which means that when the price increases by 1 % the quantity demanded decrease by 4 %.
Regarding the group with ages between 35-54 the elasticity is -0.013, it means when the price rises by 1 %, the quantity demanded falls by 1.3 %. and in the last set of ages 55-74 the elasticity is -0.022, when the prices arise by 1% the quantity demanded decreases by 2.2%
In conclusion, the demand for tobacco is more elastic in the first age group 18- 34. It makes sense because younger people tend to be more sensitive than adults to increases in tobacco prices because they have been smoking for less time and may be not so addicted. Furthermore, the fraction of disposable income spent on cigarettes by the young smoker is likely to be greater than that of an adult smoker.
The fact that older people reduced more the demand for tobacco could be related to the fact that they may be more awareness with their healthy or simply because they are a minority.