Taxation, regulation, and addiction: A demand function for cigarettes based on time-series evidence

Abstract

This work analyzes the effects of prices, taxes, income, and anti-smoking regulations on the consumption of cigarettes in California (a 25-cent-per-pack state tax increase in 1989 enhances the usefulness of this exercise). Analysis is based on monthly time-series data for 1980 through 1990. Results show a price elasticity of demand for cigarettes in the short run of −0.3 to −0.5 at mean data values, and −0.5 to −0.6 in the long run. We find at least some support for two further hypotheses: that antismoking regulations reduce cigarette consumption, and that consumers behave consistently with the model of rational addiction.