May 27, 2018 in Economics

The Economics of the Tobacco Industry

The restricted economic analysis of the tobacco industry constituted of four main elements

They are the following: the determinants of demand, the determinants of supply, the changes in the price of tobacco over last few years with their reasons counted, and the role of a government as the main policy maker in the tobacco industry.

To begin with, the most important factors or determinants, which influence tobacco demand, are price and income. According to the most recent statistics, a price increase of 10% causes 38% downgrade among either low or middle-income smokers. A number of high-income smokers decreased only by 4%. Other important factors influencing demand are smoking restrictions, advertising and promotion bans, and tastes. Smoking restrictions, for instance, presume the ban to smoke in public areas. Due to such bans, tobacco consumers often give up smoking. Regarding advertising and promotion barriers, they make people more reluctant to smoking. Though, this measure is not very effective. Speaking about tastes, it is well known that women smoke less compared to men. The same refers to different religious and race groups (Chaloupka, Warner, 1999).

At the same time, the determinants of supply for tobacco products are: cost of resources (labor or land), the organization of the market, which presumes the fiscal system and health care policy, and the number of companies on the market that compete with each other (Philip, Galt, 2009).

In addition, the price of tobacco has changed significantly over last five years. Take, for example, the USA with their increase of the price from $4.3 per package in 2007 to $4.9 in 2012. The growth of prices in European countries is even more remarkable. The prices in Estonia and Spain have increased by 100% and 60% respectively (Oosterlaken, 2012). The reason for such increase is that governments realized that it is better to make people quit smoking than to spend lot of money on medical treatment.

Governments influence the demand of tobacco mainly via taxes

So far, the highest taxes exist in the EU, with 75% and above taxes of cigarette price. In comparison to Europe, various states of the USA impose taxes that are equal to 45-60% of cigarette price (The Economist 2009). 

References

  1. Chaloupka, F., Warner, K. (1999). The Economics of Smoking. National Bureau of Economic Research. Retrieved from http://www.nber.org/papers/w7047.
  2. Oosterlaken, C. (2012). Smoking has become much more expensive within the last 5 years. Statistics Netherlands. Retrieved from http://www.cbs.nl/en-GB/menu/themas/prijzen/publicaties/artikelen/archief/2012/2012-3667-wm.htm.
  3. Philip, B., Galt, V. (2009). Business Economics. Unpublished Course Notes, Nottingham, Nottingham Trent University p 2.
  4. The Economist (2009). Up in smoke. Retrieved from http://www.economist.com/node/13432302.

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