Addicted to Nicotine
A National Research Forum

Section III: Nicotine-Environmental Risk Factors for Initiation
Nancy J. Kaufman, R.N., Chair

ECONOMICS

Frank J. Chaloupka, Ph.D.
Department of Economics
University of Illinois at Chicago

Introduction

Over the past three decades, numerous econometric studies have researched the impact of tobacco control policies on cigarette smoking and other tobacco use. These studies examine the applicability of a fundamental principle of economics - the downward sloping demand curve - to tobacco use. This principle states that as the price of a product rises, the demand for that product falls. To economists, price includes not only the monetary cost of purchasing a product but also the time and other costs associated with buying that product and the health consequences and other costs from using the product. Because of the addictive nature of smoking, economic theory predicts that changes in behavior in response to changes in price will not occur quickly, as it would for the use of nonaddictive goods, but that the effects of permanent price changes will grow gradually over time.

What We Know

Several clear conclusions have emerged from the large and growing number of econometric studies of the demand for cigarettes and other tobacco products. Permanent, inflation-adjusted increases in cigarette prices, which could be achieved by increasing cigarette taxes, will lead to significant reductions in cigarette smoking. Estimates imply that every 10-percent increase in price reduces cigarette demand among adults by approximately 4 percent; similar findings are obtained for other tobacco products.

The reductions in smoking resulting from increased prices are not limited to reductions in the number of cigarettes smoked, but also include significant reductions in smoking prevalence. Recent estimates imply that a 10-percent increase in price reduces smoking prevalence by 1 to 2 percent, while reducing the duration of the smoking habit by approximately 10 percent.

Cigarette smoking is clearly addictive in that current cigarette demand depends on past smoking. The most important policy implication of this is that the long-run impact of a permanent price increase or change in tobacco control policy will grow over time. Estimates suggest that the long-run effect of a permanent price increase is approximately double the short-run impact.

Economic theory and several recent empirical analyses imply that the price sensitivity of youth cigarette demand is inversely related to age, in part due to the addictive nature of cigarette smoking. Recent estimates indicate that youths are up to three times more sensitive to price than adults, with a 10-percent price increase reducing youth smoking prevalence by up to 7 percent while also reducing cigarette consumption among continuing young smokers.

Other tobacco control policies, particularly increased information on the health consequences of smoking, strong restrictions on cigarette smoking in public places and private workplaces, and counteradvertising campaigns, lead to significant reductions in overall cigarette demand and smoking prevalence. Tobacco products appear to be substitutes for one another. Increases in the price of cigarettes, for example, have been found to increase the use of other tobacco products, while also reducing cigarette smoking.

What We Need To Know More About

While much is known from economic research on cigarette demand, there is much more to learn. Advances in econometric methods, more and better data, and increased interdisciplinary research can help to address many of these issues.

Existing econometric evidence is based on the small changes in price that occur cross-sectionally and over time. Little is known about the impact of large price increases on cigarette demand; what is known comes primarily from the new field of behavioral economics. This issue can be partially addressed using more recent U.S., as well as international, data.

We need to know more about the compensating behavior of smokers in response to price and policy changes that may offset some of the health benefits. One study suggests that some smokers respond to price increases by switching to longer and/or higher tar and nicotine cigarettes. Similarly, little is known about the potential substitution between tobacco products and other licit and illicit addictive substances in response to stronger tobacco control policies. The very limited evidence suggests that increases in cigarette prices not only will reduce cigarette smoking but also can reduce alcohol and marijuana use. Much more research is needed, however, to clarify these relationships.

More research is needed on the impact of prices and tobacco control policies on the pathways and trajectories of smoking. This is particularly true with respect to the process from first use, through experimentation, and eventually to addiction, as well as with the processes around cessation and reinitiation. Better longitudinal data are needed to address these issues.

Information about the effects of the pricing, availability, and marketing of nicotine replacement products on both the demand for these products and on cigarette smoking and other tobacco use is needed. This is particularly relevant to both the long-term use of these products as part of a broader market for nicotine delivery products that includes cigarettes and the potential for abuse of these products.

While much is known about the independent effects of price and tobacco control policies, more research is needed on the interaction among these policies. There may be important, unrealized synergies among policies that could enhance the effectiveness of tobacco control.

There is mixed evidence from the econometric literature on the impact of advertising and promotion and other industry activities on cigarette demand, particularly on initiation, experimentation, and the transition to addiction in youth. This is largely the result of a lack of good data on industry activities and limitations of econometric methods for using available data. More disaggregated measures, better measures of exposure, improved econometric methods, and more interdisciplinary research would help to address this issue.

Relatively little is known about the differential impact of prices, tobacco control policies, and other important determinants of demand in various subpopulations. The limited existing research suggests that there are important differences with respect to age, race and ethnicity, gender, and socioeconomic status. More clarification of these differences is required.

Recommended Reading

Becker, G.S.; Grossman, M.; and Murphy, K.M. Rational addiction and the effect of price on consumption. Am Econ Rev 81:237-241, 1991.

Bickel, W.K., and Madden, G.J. The Behavioral Economics of Smoking. National Bureau of Economic Research Working Paper No. 6444, 1998.

Chaloupka, F.J., and Grossman, M. Price, Tobacco Control Policies and Youth Smoking. National Bureau of Economic Research Working Paper No. 5740, 1996.

Chaloupka, F.J., and Warner, K.E. The economics of smoking. In: Newhouse J., and Cuyler, A., eds. The Handbook of Health Economics. New York: North-Holland, in press.

Douglas, S. The duration of the smoking habit. Econ Inquiry 36(1):49-64, 1998.

Evans, W.N., and Farrelly, M.C. The compensating behavior of smokers: Taxes, tar and nicotine. RAND J Econ, in press.

Pacula, R. Adolescent Alcohol and Marijuana Consumption: Is There Really a Gateway Effect? National Bureau of Economic Research Working Paper No. 6348, 1998.