An Analysis of the Effect of Income on Tobacco Demands

Abstract

This study empirical investigates the relationship between income and demands for tobacco. This paper utilizes the recently available data which documents tobacco consumption quantities and thus the analysis is less prone to measurement errors that the previous studies relying on expenditure data suffer from. It is shown that both the proportion of smokers and the quantity consumed are highest in the middle income group. However, the quantity consumed relative to income decreases with income, suggesting the regressivity of tobacco excise. Demand estimation shows that the likelihood of smoking is not responsive to income but the consumption conditional on smoking increases very moderately with income. The income elasticities are estimated to be -0.023 for the probability of smoking and 0.038 for the conditional demand.