Estimating the price elasticity for cigarette and chewed tobacco in Pakistan: evidence from microlevel data

Abstract

While there is a large literature on the magnitude of price elasticity of cigarette demand, less is known about the same for chewed tobacco. Moreover, the studies on cigarette demand in Pakistan tend to ignore the heterogeneity in the smoking behaviour. This study estimates price elasticity for cigarette and chewed tobacco demand across different income groups, provinces and regions; and use these coefficients for simulating Pakistan's tax policy and its impact on revenue and health outcomes. Deaton model was applied on the 2015-2016 Household Integrated Income and Consumption Survey dataset to estimate price elasticities of different tobacco products. The demand for cigarettes is unitary elastic (-1.06), suggesting that a 1% increase in cigarette price would reduce its consumption by 1.06%. On the other hand, the demand for chewed tobacco is relatively inelastic (-0.55). Provincially, the own-price elasticity of cigarettes is negative and significant for all but Kyber Pakhtunkhwa (KP) province; whereas that of the chewed tobacco is negative and significant only for KP and Balochistan. Besides, the price elasticity of demand for both tobacco products is negative and significant only for lower income group and the rural region. The tax simulations favour a two-tiered tax system over the existing three-tiered system as the former will bring significantly better tax revenue and health outcomes. While confirming the effectiveness of tax policies in curbing tobacco use, this study concludes that higher tobacco taxes could increase tax revenue and improve public health in Pakistan.