Elasticities in the brazilian cigarette market
DOI:
https://doi.org/10.5902/2526629284176Keywords:
Smuggling, Licit and illicit products, Tax increaseAbstract
The aim of this study is to determine the price elasticities of demand, income elasticity, and cross-price elasticity in the cigarette market in Brazil using time series models. As the main result, the price elasticity of demand for legal cigarettes showed an elastic relationship, while the income elasticity indicated inelasticity, although it is close to unitary elasticity. The cross-price elasticity result indicated an inelastic relationship between licit and illicit cigarettes. These findings reveal that price increases through tax policies, aimed at discouraging cigarette consumption, did not achieve their intended purpose due to the natural tendency of consumers to substitute higher-priced products with lower-priced ones. The consequence, a massive entry of illicit cigarettes into this market was observed. As a result of these, the following question arises: is the increase in cigarette tax in Brazil effective in reducing consumption and increasing revenue?
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