The Impact of Income and Taxation in a Price-Tiered Cigarette Market: findings from the ITC Bangladesh Surveys

Estimating own-price and cross-price elasticity of cigarette consumption by price tiers in Bangladesh

OBJECTIVES

The overall price elasticity of cigarette consumption in Bangladesh has been studied extensively. The estimates of price elasticity by price tiers are not available in the existing literature.

METHODS

Using cohort data of nearly 6000 individuals from the International Tobacco Control Bangladesh survey, this study estimated the own-price and cross-price elasticity and income elasticity of cigarette demand by price tiers in Bangladesh. The elasticity was estimated in three stages of consumer decisions: whether to smoke, which brand to smoke and finally, how many cigarettes to smoke per day. The decision to smoke cigarettes and the choice of cigarette brands were modelled using instrumental variable probability regression. The cigarette consumption per day was modelled using seemingly unrelated regression.

RESULTS

The price elasticity of cigarette smoking prevalence with respect to the price of low-price cigarettes is -0.0487. The total elasticity for low-price cigarette consumption with respect to its own price is -0.1678. The own-price elasticity of smoking intensity of high-priced brands is -0.2512. The cross-price elasticity of low-price cigarette consumption with respect to high-price brand prices is 0.2643. The income elasticity of smoking prevalence overall is 0.0564. The income elasticity of daily consumption of low-price cigarettes is -0.1934 and for high-price cigarettes, it is 1.4044. The total income elasticity is 1.4608 for high-price cigarettes.

CONCLUSION

A cigarette tax policy that raises the prices of both low-price and high-price brands-but increases prices in the low-price tier at a faster rate than in the high-price tier and increases prices of all brands at a pace faster than income growth-can effectively reduce cigarette consumption in Bangladesh.

JEL CODES

H29, L66, I18.

Price and Income Elasticities of Cigarette Smoking Demand in Bangladesh: Evidence from Urban Adolescents and Young Adults

INTRODUCTION

Understanding the elasticities of cigarette smoking demand among the youth could help improve the effectiveness of tobacco control interventions. The objective of this study is to measure the price and income elasticities of cigarette smoking demand among urban Bangladeshi male adolescents and young adults aged 10-24 years.

METHOD

Using data from a cross-sectional survey conducted in seven urban districts of Bangladesh, we applied probit and ordinary least square (OLS) models to examine the effect of price and income on smoking participation (decision to smoke) and intensity (number of cigarettes smoked).

RESULTS

Our results showed that price was not significantly associated with the decision to smoke, while income was a significant determinant of smoking participation. Both price and income determined the smoking intensity. The positive income elasticity (0.39) indicated that participants with greater access to money were more likely to participate in cigarette smoking and smoked more cigarettes. Negative price elasticity (-0.62) implied that increasing prices could lead to a reduction in smoking intensity among adolescents and young adults in urban Bangladesh.

CONCLUSION

The inelastic price demand for cigarette smoking suggests that there is scope for increasing tax on cigarettes without compromising the tax revenue.

IMPLICATIONS

This is the first study to investigate price and income elasticities among urban adolescents and young adults in Bangladesh. The study found no evidence that increasing the price of cigarettes discourages smoking participation but did show that increasing the price reduces the intensity of smoking among existing smokers. The results also suggest that economic measures such as taxation that increase the price of cigarettes could be a useful policy tool to limit smoking intensity without compromising government tax revenue.

Impact of tobacco price and taxation on affordability and consumption of tobacco products in the South-East Asia Region: A systematic review

INTRODUCTION

The objective of the review was to study the impact of tobacco taxes or prices on affordability and/or consumption of tobacco products in WHO South-East Asia Region (SEAR) countries, overall and by socioeconomic status; and change in consumption of one tobacco product for a given change in price/tax on another tobacco product.

METHODS

The searches were made in five databases (Medline, Embase, Cinahl, EconLit, Tobacconomics) using keywords such as 'tobacco', 'tax', 'price', 'impact' with their synonyms. Additionally, the first 100 articles through google search and e-reports from targeted sources were also reviewed. Studies illustrating the impact of prices/taxes on consumption/affordability of tobacco products in SEAR, in English and with no limitation on year, were included in the review. After two steps of screening, data from 28 studies were extracted using a structured and pre-tested data extraction form.

RESULTS

Of the 28 studies, 12 studies reported an inverse association between price and consumption/affordability, while 11 studies reported no or positive association between price and consumption/affordability of tobacco products. Five studies had unclear interpretations. The majority of studies estimated that the less affluent group were more price responsive compared to the more affluent group. Some studies indicated increased consumption of one product in response to price rise of another product, although, the findings were inconsistent.

CONCLUSIONS

The findings of our review support the use of tobacco tax and price measures as effective tools to address the tobacco epidemic. Our findings, however, also emphasize the importance of increasing tobacco product taxes and prices sufficiently to outweigh the effects of income growth, in order for the measures to be effective in reducing the affordability and consumption of tobacco products.

A decade of cigarette taxation in Bangladesh: lessons learnt for tobacco control

Bangladesh has achieved a high share of tax in the price of cigarettes (greater than the 75% benchmark), but has not achieved the expected health benefits from reduction in cigarette consumption. In this paper we explore why cigarette taxation has not succeeded in reducing cigarette smoking in Bangladesh. Using government records over 2006–2017, we link trends in tax-paid cigarette sales to cigarette excise tax structure and changes in cigarette taxes and prices. We analysed data on smoking prevalence from Bangladesh Global Adult Tobacco Surveys to study consumption of different tobacco products in 2009 and 2017. Drawing on annual reports from tobacco manufacturers and other literature, we examine demand- and supply-side factors in the cigarette market. In addition to a growing affordability of cigarettes, three factors appear to have undermined the effectiveness of tax and price increases in reducing cigarette consumption in Bangladesh. First, the multitiered excise tax structure widened the price differential between brands and incentivized downward substitution by smokers from higher-price to lower-price cigarettes. Second, income growth and shifting preferences of smokers for better quality products encouraged upward substitution from hand-rolled local cigarettes (bidi) to machine-made low-price cigarettes. Third, the tobacco industry’s market expansion and differential pricing strategy changed the relative price to keep low-price cigarettes inexpensive. A high tax share alone may prove inadequate as a barometer of effective tobacco taxation in lower-middle income countries, particularly where the tobacco tax structure is complex, tobacco products prices are relatively low, and the affordability of tobacco products is increasing.