Year of Publication

2016

College

Martin School of Public Policy and Administration

Committee Chair

Dr. Eugenia F. Toma

Executive Summary

The objective of this study examines whether the way to raise cigarette prices drastically and discontinuously is effective in reducing cigarette consumption. We use monthly data for cigarette consumption to measure the price elasticity of cigarettes’ demand and adopt real cigarette prices, real individual income, education level, and unemployment rate as independent variables. We consider how consumers adjust their consumption practices in response to the increased prices. After examining the result of regression, we conclude that cigarette real price has a significant association with the reduction in cigarette consumption. If we divide the last twelve years into periods when prices remained stable and periods characterized by a sharp price increase, we will see a statistically significant effect in the last period with a steep price increase. The results show that in reducing the cigarette consumption, the sharp price increase in cigarette prices at a drastic tax rate is a good alternative to the gradual price increase at an appropriate rate.

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