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Price Elasticity Estimates for Tobacco and Other Addictive Goods in India

  • Rijo M John

    (Indira Gandhi Institute of Development Research)

The tax base of tobacco in India is found to be heavily depended on about fifteen per cent of the tobacco users who represent cigarettes smokers. Non-cigarette tobacco products used by the majority of tobacco users are largely out of the tax net. Analysis of the price elasticity of various tobacco products would bring out the potential of tax as an instrument to control tobacco use of any kind. In this context, this paper examines how the demand for a variety of tobacco products and addictive goods such as pan and alcohol respond to changes in prices. The spatial variations of prices that are obtained from a cross section of 120,000 households spread across the country have been used for this purpose. Estimates of price elasticities showed that the own price elasticity estimates of various addictive goods in India ranged between -0.5 to -1.0 with bidis, leaf tobacco and alcohol having elasticities close to unity, cigarettes being the least price elastic of all. As against the general notions regarding the complementarity between cigarettes and alcohol, our study finds that these are substitutes at least in urban India. We also observed that, over a five year period, the addictive goods such as bidis and leaf tobacco in India have become slightly more price responsive while elasticity of cigarettes and pan have stabilized. With some assumptions, it is shown that taxes on cigarettes can be raised nearly 2.5 times the current level while that of bidis can be raised tenfold without any fall in revenue.

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Paper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 22395.

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Date of creation: Jan 2005
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Handle: RePEc:eab:microe:22395
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  1. Chaloupka, Frank J. & Warner, Kenneth E., 2000. "The economics of smoking," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627 Elsevier.
  2. Rijo John, 2004. "An analysis of household's tobacco consumption decisions: Evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2004-002, Indira Gandhi Institute of Development Research, Mumbai, India.
  3. Kenneth Clements & Wana Yang & Simon Zheng, 1997. "Is utility additive? The case of alcohol," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1163-1167.
  4. Directorate General & Economic and Financial Affairs, 2000. "Conference "Enterprises 2002" - 6 June 2000," Papers 40, Commission of the EEC - Euro Papers.
  5. Susan H. Busch & Mireia Jofre-Bonet & Tracy A. Falba & Jody L. Sindelar, 2004. "Tobacco Spending and its Crowd-Out of Other Goods," NBER Working Papers 10974, National Bureau of Economic Research, Inc.
  6. John, Rijo M., 2005. "Tobacco consumption patterns and its health implications in India," Health Policy, Elsevier, vol. 71(2), pages 213-222, February.
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