TAXATION, REGULATION, AND ADDICTION - A DEMAND FUNCTION FOR CIGARETTES BASED ON TIME-SERIES EVIDENCE

This work analyzes the effects of prices, taxes, income, and anti-smok ing regulations on the consumption of cigarettes in California (a 25-c ent-per-pack state tax increase in 1989 enhances the usefulness of thi s exercise). Analysis is based on monthly time-series data for 1980 th rough 1990. Results show a price elasticity of demand for cigarettes i n the short run of -0.3 to -0.5 at mean data values, and -0.5 to -0.6 in the long run. We find at least some support for two further hypothe ses: that antismoking regulations reduce cigarette consumption, and th at consumers behave consistently with the model of rational addiction.