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Tobacco Spending and its Crowd-Out of Other Goods

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  • Susan H. Busch
  • Mireia Jofre-Bonet
  • Tracy A. Falba
  • Jody L. Sindelar

Abstract

Smoking is an expensive habit. Smoking households spend, on average, more than $1000 annually on cigarettes. For households in which some members smoke, smoking expenditures crowd-out other purchases, which may affect other household members, as well as the smoker. We empirically analyze how expenditures on tobacco crowd out consumption of other goods, estimating the patterns of substitution between tobacco products and other expenditures. We use the Consumer Expenditure Survey (1995 to 2001), which we complement with regional price data, and state cigarette prices. We estimate a consumer demand system of expenditures on cigarettes, food, alcohol, housing, apparel, transportation, medical care and controls for socio-economic variables and other sources of observable heterogeneity. Descriptive data indicate that, compared to non-smokers, smokers spend less on housing. Results from the demand system indicate that as the price of cigarettes rises, households increase the quantity of food purchased, and, in some samples, reduce the quantity of apparel and housing purchased.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10974.

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Date of creation: Dec 2004
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Publication status: published as Busch, Susan H., Mireia Jofre-Bonet, Tracy A. Falba, and Jody L. Sindelar. "Burning a Hole in the Budget: Tobacco Spending and Its Crowd-Out of Other Goods." Applied Health Economics and Health Policy 3, 4 (2004): 263-72.
Handle: RePEc:nbr:nberwo:10974

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  1. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 312-26, June.
  2. Lisa Barrow & Leslie McGranahan, 1999. "The earned income credit and durable goods purchase," Working Paper Series, Federal Reserve Bank of Chicago WP-99-24, Federal Reserve Bank of Chicago.
  3. Frank J. Chaloupka & Kenneth E. Warner, 1999. "The Economics of Smoking," NBER Working Papers 7047, National Bureau of Economic Research, Inc.
  4. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 947-958, September.
  5. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521296762.
  6. Jones, Andrew M, 1989. "A Systems Approach to the Demand for Alcohol and Tobacco," Bulletin of Economic Research, Wiley Blackwell, vol. 41(2), pages 85-105, April.
  7. Sandra L. Decker & Amy Ellen Schwartz, 2000. "Cigarettes and Alcohol: Substitutes or Complements?," NBER Working Papers 7535, National Bureau of Economic Research, Inc.
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Cited by:
  1. Rijo M. John, 2005. "Price elasticity estimates for tobacco and other addictive goods in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2005-003, Indira Gandhi Institute of Development Research, Mumbai, India.
  2. Xiaohua Yu & David Abler, 2010. "Interactions between cigarette and alcohol consumption in rural China," The European Journal of Health Economics, Springer, Springer, vol. 11(2), pages 151-160, April.
  3. Rijo M John, 2006. "Crowding-out Effect of Tobacco Expenditure And Its Implications on Intra-Household Resource Allocation," Microeconomics Working Papers 22396, East Asian Bureau of Economic Research.

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