The crowding-out effects of tobacco and alcohol where expenditure shares are low: Analyzing expenditure data for Taiwan

In this paper, we used data from the 2004 Survey of Family Income & Expenditure of Taiwan to show that the problem of the crowding-out effects of tobacco and alcohol in a country with low expenditure can still be serious. Most studies that have investigated this issue have focused on developing countries with a high expenditure share on tobacco or alcohol, and have often overlooked the effects in countries with a low expenditure on such goods. After controlling for the endogeneity of tobacco and alcohol expenditure, and the possibility that households with a zero expenditure on tobacco and alcohol may result from a corner solution rather than abstention, we found that the lowest income households are still most vulnerable to tobacco and alcohol expenditures despite an overall low expenditure in Taiwan. Even higher income households may suffer a lower standard of living due to such expenditure. In addition, some goods and services may be perceived differently by households with different levels of income and this may be caused by the difference in composition across broad expenditure categories. Our results suggest that the government ought to tackle the problem of smoking and drinking outside the realm of health, since these expenditures may harm the country's standard of living even when there is high income.