Estimation of tobacco price elasticity in Serbia: evidence from macro and micro approach

Abstract

Previous research has indicated that tobacco price elasticity is negative and relatively inelastic. However, no such estimates are available for Serbia and Western Balkan region in general. Serbia is a middle income country with high tobacco consumption, low prices of cigarettes, and large perceived impact of multinational tobacco producing companies on public revenues, export, and employment. The aim of this research is to provide the first estimates of the tobacco price elasticity for Serbia based on two estimation approaches. The first approach includes macro-level time series and regression (cointegration) analysis. The second approach is based on the microdata from the Household Budget Survey and a theoretical model proposed by Deaton (1988). According to our macro-level approach estimated cigarettes price elasticity in Serbia ranges between -0.76 and -0.62, while micro-level approach suggests elasticity at intensive margin of -0.45. Bootstrapping procedures confirm that reported elasticities are statistically significant. Our research suggests that by increasing tobacco taxes, and consequently tobacco prices, the government can produce two positive effects: lower cigarettes consumption and higher government revenue. Given that the estimated elasticity is negative, the increase in tobacco prices would result in lower cigarettes demand, which could lower the negative consequences of smoking on health. On the other hand, the relatively inelastic elasticity suggests that demand reduction would not be proportional to the increase of the price, which would, in turn, result in the increase of the government revenue from the tobacco tax collection.