Abstract
BackgroundIndonesia is one of the largest consumers of tobacco in the world, however there has been little work done on the economics addiction of tobacco. This study provides an empirical test of a rational addiction (henceforth RA) hypothesis of cigarette demand in Indonesia.MethodsFour estimators (OLS, 2SLS, GMM, and System-GMM) were explored to test the RA hypothesis. The author adopted several diagnostics tests to select the best estimator to overcome econometric problems faced in presence of the past and future cigarette consumption (suspected endogenous variables). A short-run and long-run price elasticities of cigarettes demand was then calculated. The model was applied to individuals pooled data derived from three-waves a panel of the Indonesian Family Life Survey spanning the period 1993-2000.ResultsThe past cigarette consumption coefficients turned out to be a positive with a p-value < 1%, implying that cigarettes indeed an addictive goods. The rational addiction hypothesis was rejected in favour of myopic ones. The short-run cigarette price elasticity for male and female was estimated to be-0.38 and -0.57, respectively, and the long-run one was -0.4 and -3.85, respectively.ConclusionsHealth policymakers should redesign current public health campaign against cigarette smoking in the country. Given the demand for cigarettes to be more prices sensitive for the long run (and female) than the short run (and male), an increase in the price of cigarettes could lead to a significant fall in cigarette consumption in the long run rather than as a constant source of government revenue.
Highlights
Indonesia is one of the largest consumers of tobacco in the world, there has been little work done on the economics addiction of tobacco
The demand equation is tested on individuals aggregated data taken from three-wave a panel of the Indonesian Family Life Survey covering the periods 19932000
Select the best alternative one to overcome the econometric problems faced in presence of endogenous or predetermined variable
Summary
Indonesia is one of the largest consumers of tobacco in the world, there has been little work done on the economics addiction of tobacco. The World Health Organization has developed the WHO Framework Convention on Tobacco Control [1] This framework is an evidence-based agreement that reaffirms the right of all people to the highest standard of health, and represents a paradigm shift in developing a regulatory strategy to address addictive substances. A standard economic model assumes that consumers demand goods (including cigarettes and other tobacco products) in order to maximize their utility subject to a set of constraints such as prices, income, and other factors. This implies consumption decisions at a given point in time are independent of past choices [3]. A smoker will suffer significant adjustment costs if consumption is stopped
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