Thursday, January 18, 2007

Puff harder, the price went up

An attractive paper by Jérôme Adda & Francesca Cornaglia in the September 2006 American Economic Review (a preprint here) re-examines popular accounts of the price-sensitivity of the demand for cigarettes.

Smoking can be defined as a process by which agents give their brains a nicotine hit. Nicotine is a psychoactive stimulant and one of the most addictive drugs around. Cigarettes are an efficient nicotine delivery device – once inhaled nicotine can reach the brain’s pleasure centres in less than 10 seconds where it increases the release and delays the metabolism of dopamine. It is this dopamine release that smokers seek.

This suggests that if the price of cigarettes rises because of a tax increase that consumers might endeavour to increase the nicotine they gain per cigarette by smoking each cigarette more intensively. This might occur by puffing harder, increasing the number of puffs, inhaling for longer periods and blocking ventilation holes on the cigarette filter. If this is true then the conventional findings that the demand for cigarettes is reasonably responsive to price (elasticities of the order of -0.4) in the short-run and a higher elasticity in the long-run (perhaps -0.7) might overstate the health benefits from smoking.

Adda and Coraglia build on work by William Evans and Matthew Farrelly (1998) and Jeffrey Harris (1980) in confirming such compensatory behaviour particularly among heavy smokers. They find that a 1% increase in taxes causes a 0.4% increase in smoking intensity. Smokers not only cut their smoking with a tax increase but compensate by smoking more intensively.

Smoking more intensively has the additional health cost of causing cancer deeper in the lung – see Michael Thun et al. (1997) – an adverse effect from a health perspective. This suggests that the value of excise taxes on cigarettes as a means of improving health has, in the past, been overstated.

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