Analysis of cigarette demand in Argentina: the impact of price changes on consumption and government revenues.

Abstract

To estimate cigarette demand and to simulate a tax policy targeted to reduce tobacco consumption. Demand was estimated using a vector error correction model. Simulation exercises present the impact of a tax increase on consumption and revenues. Changes in real income and the real price of cigarettes affect the demand for cigarettes in Argentina. The long term price elasticity is 0.279 (a 10% increase in real prices reduces cigarette consumption by 2.79% per quarter) and the long term income elasticity is 0.411 (a 10% increase in real income raises consumption by 4.11% per quarter). Even in a conservative scenario, simulations show that increasing the price of cigarettes by 100% using excise taxes would maximize revenues and reduce cigarette consumption. There is sufficient room to increase taxes, reducing cigarette consumption, while still increasing tax revenues.