Elasticity of tobacco products in Croatia

Abstract

Introduction Having an estimated cigarette price elasticity of demand for a specific country is very useful for planning purposes and it enables precise estimation of how much a tobacco tax increase will affect government revenues and tobacco use. Methods In order to estimate the price and income elasticity of cigarette demand in Croatia, we used aggregate time series data on cigarette consumption, cigarette prices, income and smoking restriction policies from 2000 to 2017. After specifying conventional cigarette demand model in linear functional form, we applied both Error Correction Model (ERM) and Autoregressive Distributed Lag (ARDL) cointegration framework to examine the short-run and long-run characteristics of cigarettes demand. In addition to aggregate time-series analysis, we used data obtained from household budget surveys (HBS) for three years (2010, 2011 and 2014) to estimate cigarette price elasticity in Croatia. Results The results of the research carried out within this project indicate that in Croatia, the demand for tobacco is price-sensitive. The aggregate time-series analysis suggests that a 10% increase in prices would result on the average reduction in long-term demand for cigarettes by between 4.4% and 6.1%. Estimated results of analysis based on Deaton’s (1988) model indicate that a 10% increase in cigarette price would lead to a 10.7% decrease in cigarette consumption. Conclusions The government should increase taxes on tobacco and related products, especially the portion of specific excise duties in order to raise their price so that tobacco products will become less affordable over time.