Tessa Langley Lecturer in Health Economics, University of Nottingham
Howard Reed Director, Economist, Landman Economics, London
Abstract
Background
Increasing the retail price of tobacco products is recognised as highly effective in reducing demand for tobacco and has been a key component of government policies aimed at reducing smoking prevalence for several decades in the UK. In order for policymakers to know how effective increasing tobacco prices might be, it is important to have as accurate and reliable an estimate as possible of the extent to which demand for tobacco is affected by price increases.
Method
We used monthly data on cigarette clearances and weighted average prices of cigarettes to estimate the price elasticity of demand for duty paid cigarettes – the impact of a 1% price increase on cigarette consumption – in the UK between 2001 and 2011. We analysed the data using an Engle-Granger two‐step cointegration procedure.
Results
We specified a range of models which estimated a price elasticity of -0.66 to -0.5, implying that a 1% price increase reduces consumption by 0.5 to 0.66%.
Conclusions
These estimates are lower than those recently published by HM Revenue and Customs, but in line with estimates in the published literature. Our estimates suggest that increasing cigarette prices in the UK continues to be an effective method of reducing cigarette consumption.
Source of funding: Cancer Research UK Tobacco Advisory Group
