Own- and Cross-Price Elasticity Estimates for Cigarette Consumption in Pakistan [Working Paper Series]

This Working Paper was written by Social Policy and Development Centre in Pakistan. The working paper assesses the own- and cross-price elasticities of cigarettes by price tier. Comparing cigarette consumption before and after the significant tax increase in February 2023 affirms that cigarette demand is responsive to price. Self-reported consumption of premium, economy, and illicit brands decreased, with the largest decrease among the low-income group. The researchers estimate that the own-price elasticity for premium cigarettes is -0.566, while the elasticity for economy cigarettes is -0.24 and for illicit cigarettes it is -1.96. Following a price increase for premium cigarettes, there would be an increase in the consumption of illicit cigarettes, with a cross-price elasticity of 0.95. A price increase for economy cigarettes would lead to a greater increase in the consumption of illicit cigarettes, with a cross-price elasticity of 1.153. On the other hand, a 10% increase in income would increase consumption of premium cigarettes by 8.09% and economy cigarettes by 0.75%, while decreasing illicit cigarette consumption by 0.7%. The working paper concludes with recommendations for policy makers to strengthen tax administration to bring illicit cigarettes into the tax net, as well as continue to raise excise taxes.