Estimating Price Elasticities When there is Smuggling: The Sensitivity of Smoking to Price in Canada

Jonathan Gruber, Anindya Sen and Mark Stabile

No 8962, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A central parameter for evaluating tax policies is the price elasticity of demand for cigarettes. But in many countries this parameter is difficult to estimate reliably due to widespread smuggling, which significantly biases estimates using legal sales data. An excellent example is Canada, where widespread smuggling in the early 1990s, in response to large tax increases, biases upwards the response of legal cigarette sales to price. We surmount this problem through two approaches: excluding the provinces and years where smuggling was greatest; and using household level expenditure data on smoking, where there is a downward bias to estimated elasticities from smuggling. These two approaches yield a tightly estimated elasticity in the range of -0.45 to -0.47. We also show that the sensitivity of smoking to price is much larger among lower income Canadians. In the context of recent behavioral models of smoking, whereby higher taxes reduce unwanted smoking among price sensitive populations, this finding suggests that cigarette taxes may not be as regressive as previously suggested. Finally, we show that price increases on cigarettes do not increase, and may actually decrease, consumption of alcohol; as a result, smuggling of cigarettes may have raised consumption of alcohol as well.

JEL-codes: H2 I1 (search for similar items in EconPapers)
Date: 2002-05
New Economics Papers: this item is included in nep-hea
Note: EH PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Gruber, Jonathan & Sen, Anindya & Stabile, Mark, 2003. "Estimating price elasticities when there is smuggling: the sensitivity of smoking to price in Canada," Journal of Health Economics, Elsevier, vol. 22(5), pages 821-842, September.

Downloads: (external link)
http://www.nber.org/papers/w8962.pdf (application/pdf)

Related works:
Journal Article: Estimating price elasticities when there is smuggling: the sensitivity of smoking to price in Canada (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:8962

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w8962

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().