ELASTICITY ON CIGARETTES 2
There have been various articles written on cigarettes and how they affect users; this
proves the need to examine how cigarettes and its sale affect the economy and its elasticity. In
the article ‘The Price elasticity of demand for cigarettes in the UK, 2001-2011: Tessa Langley’
by Reed, Anort and Langley, there is the analysis of the elasticity on cigarettes and the effects of
the same. First, the article reveals that elasticity of cigarettes has been a major component that
the government uses when reducing the smoking habit in the country. Once retail prices of
cigarettes increase, demand decreases sharply thereby proving to be a very effective method of
regulating smoking of the product. However, knowing the effectiveness of increasing tobacco
prices require a better knowledge and accurate and reliable estimate of the degree to which prices
of tobacco affect demand of the same.
The article highlights the various methods used when checking the impact of prices of
tobacco on the demand of the same, and one which stands out is the monthly data on cigarette
clearances and weighted average prices of cigarettes for the estimation of the price elasticity of
demand for duty paid cigarettes. The method use was the Engle-Granger two-step revealed that
there is a great impact for increase in the prices of cigarette by one percent. The article reveals
that there is an estimated price elasticity of between -0.78 and -0.35 thereby proving that an
increase of the price of cigarettes by 1 percent reduces consumption by 0.35 to 0.78 percent. The
findings prove that increasing the prices of cigarettes is a very effective method of reducing
smoking of cigarettes and policy makes should utilize the same concept.
