Price and income elasticities of demand for cigarette consumption: what is the association of price and economic activity with cigarette consumption in Spain from 1957 to 2016?

Abstract

Objectives: Extensive empirical and theoretical studies have been devoted to analyzing the relationship between tobacco and income. The price and income elasticities of demand for cigarette consumption are the main focus of studies in this body of literature. However, few empirical studies exist that analyze how economic growth affects the cigarette market, and no one has studied the effects of economic expansions and recessions. Spain, as in the other countries of the European Union, has suffered a strong recession since 2008. Therefore, this article aims to detect if income elasticity takes different values in economic growth and recession and, in addition, to check whether price elasticity in Spain is consistent with previous studies. Study design: This is an observational epidemiological study. Methods: In this article, the price and income elasticities of demand for cigarette consumption are measured for the Spanish cigarette market using time series data from 1957 to 2016 and by applying a non-linear autoregressive dynamics lag model. The novel specification proposed in this study is the determination of the possible effects of asymmetries in the economic shocks on cigarette consumption. Results: Our results reveal that cigarette consumption maintains a notable asymmetric relationship. In particular, our results show that in expansion shocks, cigarette consumption increases (a 10% economic growth is associated with a 4.05% increase in cigarette consumption), whereas in recession shocks, cigarette consumption decreases dramatically, with a more pronounced pattern in recession phases than in expansion phases (a 10% economic decline is associated with a 58.16% decrease in cigarette consumption). On the other hand, price elasticity maintains the same behavior shown in the previous literature (a 10% price increase is associated with a 2% decrease in cigarette consumption). Conclusions: Higher cigarette prices are associated with decreased smoking. In addition, the economic recession helps in decreasing cigarette consumption. Therefore, it is strongly recommended that tax authorities have our results in mind before establishing health policies. If the authorities do not, it is possible that they will not obtain the expected results in terms of decreased tobacco consumption.