New Evidence on Demand for Cigarettes: A Panel Data Approach

Abstract

This paper estimates the demand for cigarettes using panel data - 42 states and Washington, D.C. - from 1961 to 2002. We first employ the panel unit root test before estimating the demand structure. We have found that (i) the price and income elasticities are approximately -0.41 and 0.06, (ii) the price elasticities of neighboring states is 0.09, (iii) decreasing tax elasticity gives rise to decreasing price elasticity, and smaller tax shares (real tax as percentage of real price) seem to be related to declining tax elasticity, (iv) overall antismoking campaigns have contributed to declining income elasticities across different income groups, and (v) the decline in income elasticity for dividend and transfer income recipients is the main cause for the decrease in overall income elasticity. It has interesting implications: cigarette consumption is a normal good to wage earners and transfer payment recipients, but an inferior good to the owners of stocks and the elderly population.