Pr--'ce e-asm -4c i:-.- -;e--ned as the
per7:entage cnange ::~-=and -L
a one Derzent c---nze -4- const;=er price. For
examiole, if :'-.e sr:.ze
o- ci;arezze dezan--: was a one nrice increass
wo-,L-: :---:-ze a ~j.7'
dec:ease in de=an:.
. ;ocd understan.`-~n.7 of price elastic-:-~es is
aecessary -Dr as=
A
fuli 4--pac:s a-- ~.--z-er cigarette taxes. If the
price the
de=an~~ for cisS.-e:Z=-s was found to be '-igh,
the percenta;e i-ncrease
govern--en:: result--ing from a increase -would
'--e subs:a%----i--
less :han the -.)er:z-n:aze increase in .re tax,
due :a sha-:-,!-. -.C-=es.
For the purpose of assessing the short term
impacts of c4-?,are:--a
taxes, ar. assess-men: of the average prize
elasticity of the tocal c:ns=er
demand for cigare::es is suff:Lcient. :: is not
necessar-: to sepa:-Tze,
examDla, the reduc:-~cn in the number c-f smakers
from the dailv 7.-=*.-er cf
cizare:-.es smoked: only the total ef--~ects are
important.
is no: necessa-.:- :: distinguish among the
different elas:4-cities off age
groups, social grc-.:--s am between heav-.- and
light smokers.
The average elast~-z-`:ies discussed in =he renort
cannot '--e used,
for all purposes. For example, healt'- researchers
would -wi sh tz --ncw t-e7
pr'ce elasticity c-f the demand generated by
heav-r smokers.
Some researchers have found tha: :'-a price
elasticity of de--a:-. --' 4-- this sector is
significantly lower thaz the average
elasticity an6, t`e refore, the impact cf price
increases an the of
health prc:)Ie=s be muc- less than on the
reduction of govarn:=a:'.Z ravenue.
A review of the literature provided useful
articles an the su'--fetcr
pr-*ce elastic-4:-.- -z:z cipret:es. We `::cused
on the N'ort*- Amer4zan l'teratu're,
s-ce differences *--e:-,;een social faczc:s might
cause subs::antiz--"-:: ~`ifferen::
responses :j Frize :--a-.gas 4-- Europe as
compared to Cana,-a or t*-a
S:azes. A 14-s:: c-- z'-e 7mcsz :aTresen:a:ive
Nor::h Amerj.c;l~-. arti--'-a-z
U4
includa~ i-- the ra7:7:-
C=)
r")
(--4
BATCo document for Province of BritiSh Columbia 20
April 1999


7. a re-, Ca-.ad~~-n 14_teta:-_~re, -.:e -~--je
found _-nly :-.;c s:ud_-s
rz_zort:e-_~ ilsszici:~-as fur ci;_=retzes. 'he
fizz: -.;as a =aser b,-
and Mc__ nu b- -ed 4n :z!; (:'. -.:nich re=::7:e,`
*ce elas:~-Z--z-,
-ampsc- a P----
7-e _ca:ond Iznad:Lan st-.;_~-: was cl-:7_~ed out
---: ::-.e 07.:ar~_o
-orce cn S=okinz and re--crted in !zE-" (2). 7hat
stu_-;~-- fcund ver-.,
:esults: a nrice e1as:J_c_4:-: of -0.73.
t-.e da:a '--ases of :'-ase szudt_as, we `Z%-e :he
=e:-odolo.r~_-__-
.:sed 4-- :-e st-4_~ as, ane 7e-:eated zhe ana
with '-a refi-led met' ~s.
C_
repcrt, find_~-zs of analyst_i c:nfIr-_ed the
e asti:::.-_ies in ::*-e earlier studies. Because
::-- :',a ref-_'-emen:s,
analys~_s ;-.zduce--' higher sta:4-stical
co-.-.e__S::J.Ons t*---n the p-:e,:--ous
and, t'a-refore, :he results of our analsis have
not conf;_rmed the
results zf :*he =-:avious wcrzk, but also
increased our zorfidence in tne
reliab~_* --*:-,- of :-e findings.
'.;e founz' this pa::iculariv enccuraging since
the U.S. literature reno::S a
-.ery w~_-_e range -,-.: price elasticities in t`a
various =avers listed in :'-e
-. . ::~ most of -the articles, the range is fro=
-0.1 to -0.9,
'blios: .3hy. I
same ra-:~rts shc--;4_1.Ig fiz-.:res even outside
:-.--'s rat-er -.;~_de ranze.
3 ecause at this rarze, we ca:ried out some
anal7sis of our own an,_~
anclied the met'caology --sed in our Canad-~-n
study tc data. As
z4 escri ed the report, -..;e found slightly
--gher elasticities for the
-nited E:ates t-w- for Canada. Si--ilarl%- zz the
Cana-_ian results, our
analys4_5 ?roduce--* high statistical
correlaz~_zns, and zonfirmed the res-.;I:s
z--: those '_.S. PaTers that found elastic-4:4-as
near the u-pper bound ot t-e
range ~_-._`icated --`Dave.
C:)
CD
BATCo document for Province of BritiSh Columbia 20
April 1999


su~_- Se ::,c s S . pa:e--s r snowed par: _ow
an~_ :rtad :z idenz:,f-, :,e r--asons for --'-e
discre--a-c:.es. "; a
,:ou'd se-:e:a! reascns are z-;:-'ined ~_r. the
repcrz.
3 umm a r -.- z f Da a nt -- `:~ --: --' nz -
~A and 13 shc-.; the an=;al c:nsum::ion of
cigarettes -;- Canada and
tie ',:r--:ed States. 711e scl4d 1' e 4-1 t`a
-agrarn-s :.ndicates a ":;a:u-.a:4on"
smcki:-z --ropens-4:-, whic-, afzer Sc=e
ex:)E7z_-entati:n, was foun--: :z be
cigare:::as per --;a-.- -~er a-`,;1z ma-e in
Ca.-.a--:a and 15.3 cigarettes ::e-. a--:,-. 7-
ma.le i:: :he Unt_:ad Szazas.~
Zxhibi:5 1A and 13 zlear-,y show the dec2.--'-e in
cigarette const=ption during
z~e De=ression cf -.he 11230's. lxhilbi: 13 shows
a significant drc-: in
consum;zion in the ~:hite,_' States after 1953
when t*-e link be:-jeen- cigarette
smoking and lung cancer -.as est-a'--lished;
curiously, no such declL-ae occ-zrred
in Canada. After 1963, consu;mpz_-*cn dropped
visibly in the United States as
-the res-..;:: of stepped-u= ca=pa_4Zns against
smoking and the bannLng of
cigarez:a adver,:isf-mg cm zelevisf_:M. In Canada,
there was no visible decline
of cons-=ption, alt'"oug' tha st-azt-stical
analysis d-id indicate a trend reve:..-.--'
in the 1970's, as ex-.)1at.-ed in t-e remor,:.
However, the i=pact of tha: reversal
-was co==ensated b,: the 3:imulat", a-ec: of
dec_l4_n_'-g real- prices.
-xhib--*zs 2A and 1-3 show the "basz---" smoking
propensities of men, 1-0 years of
age and older. The pro-pensity is expressed as the
average number of cigarettes
per year, and relates the entire population in the
defined group, i.e. it
includes non-s=okers. :-e popu2_=:_jon in !`is
group excludes, however, the
"old" zeneraticn defined in the footnote.
As ex;-!ained :Ln the report, an examination of
historical cigarette
cons-,:mption by sex and age Sr3u? indicated that
the following
broad assumpzions przvide a re_--sonably simple
mcdal of the relative
s-_o'1-_-g propensi`:-: c--- ?o?ula:::.zn grzou=s:
the ave:age number of
da-,*!-.- cigare::es by fe=aies :-- vears and over
is one half of the
nu='-,e: smoke--: b-:- :he =_:uivalen: =ale
(defined as the "basic"
smok-_ng propensi:y) ; --'-e ?ro;ensiz, of
:eenagerrs (1-5 to 19) is one
.2 f: the women '--orn befc7e 1896 and =en
born '--efore in _--nada or :531 in :-e United
States have
nez, -_iible S--okinz pr~77ensities.
BATCo document for Province of BritiSh Columbia 20
April 1999


~b -:z and so --'-e rea- or~ce i:-. --ces c' :4
zar=::-2s ~n :ana'4a
n e c __- .3
a-.
a r e zi e-'a z ez:a E e of a!-' ::~-nsumer
a:::--'s ::=bined.
-he anal-:34-s czns-__--:ed c- ff-fnz a
corre"a:tzn between :he smok~-3 ~ro=ens4:y
4-r, tie -.)a:,: :f Ex-_':4_:3 and 23 a.-.--: :-.e
real- prize snown in ::-e too
oar: of :ne ExI-_"_-_-_.-.
-'-e resu'---3 of t~_-'i anal,sis are Zx-_--it 3.
7-e
equationS -_,sed in :ne ana--!s--'-z are sho---r.
4-- zl-e bottom -~ar: cf the Ex`._~*_-_~t.A
=ore de::-='--'ed ex::___=naticn of :-e a:)Droac"
use--: in the ana-vs-'s is Drovided in
r--Ie re?c---..
:n brief terms, t:x, :..pes of ana--.--sis were
oer-ormed: t*-e first type explored
::'-e rela:4-in bet-.;een the anz-.;_- c-arges of
vo.';.=es and prices, the second type
explored :*-e relacizn between :he absolute
le,.els of vo:=es and prices. 7he
first a;;:aac" prz-:4-des 4_-fo=_a:4_:n on short
ter-m elasticities, the second
on lone :a--= elas:_Izities.
7 he effects of dis-:csable inc:me .:are also
inc-uded in the oriiinal evzations,
but were _-'fund to *--e sza:istf=aI'_-:
'Insignifican:- 7his cc-n-fi=ed the
results cf manv o:'-e:- stu-'ies rencr:ed in the
:iterature.
. si-own t_- Exhilb4-: 3, the s'ncrz :a= price
elasticity of t e de=and for
:,s
cigarette-s was fou::-- to be a-:-zrox4_-ately
-0.75 in Canada and -0.8 in t-e
Szl:es. Vne long --e= elas-cicity was found to be
hig'ner: approximlacelv
-0.9 in Canada and more t:-.an -1-1 in the United
States.
in additi:7. to the _~eDendence :n price, the
annual changes in cigarette
vclumes a-so showe.-4 a deoendenze -n a trend tac
could no: be exo1ained bv
nrice or :_nco=e. :-_'s tzenzl as Tcsitive, bct-
in Canada and in :-e '_'n_~Zed
5--azes*- -.;n:U nez-1:z-ve therez-.-:er in boz'-
cc-_ntries.
:-e Of :,-.e .353, "scare" in -.-e United States
w-en -.-e
-.;as in'te7r_~--1:ed
L14
L_j
__4
cc
BATCo document for Province of BritiSh Columbia 20
April 1999


F., I-:- - -
.;-s a"=!a4_nec --n rencr: , four --;a:-t ncin:_z
'oef:rz_ 1953 wera
,he cans-"-an da= -:e:--.- s:ronz in 7z-a-'
P:---zes _i- 1 was foun-_ to
have an over,;re' 4--fl--ance cn : -.e res,.~__:s
of : -e stati_z::.::a_' analysis
and it -.;as felz :.-.a: :~,ese resu-:z be -_=iuly
i_-I_-'_.;enced by a
single ~_-:ent. Fz,aver, _-:1usicn of lc--r Doin:s
:..:. the daza
series d'-d not c"-Znze :-e 0- ana--:s-'s
s-*zn--::a-:_-:
rec`uced a e:etanc.
?roiecti:ns
.rl.s outlined in ar-::'-er rezcrt, presen:
fec'z_ral tax re3ulat-4-cms tend to
?erpetua:a :Ln_-;la::.:-i. 7he federal ca,:
lncreasas, zz=bined a s7,ar7)-%,
reduced rate of Sz_:-.eraj inflatior and __ar-=:-_
4--creases in cizarette taxes in
several -.rovinces, such as Alberta, and Ne-.;
Brunswick, w:Lll cause
--ery sfgn"icant --creases -*n the real orz-:zs of
ci;aretzes Canada. The
astima:ez' increases are s*-C-.-n in 2A.. It Is
esti=aeed :hat the
average consumer =r'ce of cigarettes ;ill increase
I-rom 1982 zo 1983 by
12 : and from 1982 :o 1985 25Z, even Lf no
z_-ar:haz changes are applie-i to
Trovinc~_a: ta-x rez%~Iaticns. The :985 -irice
-,4_!l be significanzi, hig*-er
~n real :er=s than it has -_~aen during :he ;_=s:
30 years.
5.
:_4 our findings on elascici:ies are czr-.ac:, a
TZ fop^ in cizarette sales can
'--a expected in 19-:2 and a 12: drc,: by
zz=Dare,_' with 19-K. Although
there mav be some time laz Ln the acz-.;_=l
raI_-=4_on ::~ price c'na-ages, a sharv droz
4-a cigarette sales zan be expecte_-: in :he .a-x:
few -,ears as ---dicated i:-.
Zxhibit I-A.
t.J_4
C)
rIj
BATCo document for Province of BritiSh Columbia 20
April 1999


Exmiz- - A
CIGARETTE C--NSUMFTION
CAN-' A
SIL-IONS
G-RETTL-1
I
C
70
60
50
40
30
20
10
I
19311 194 1961, 1971 IS S~
U-4
C:)
r1 j
U-4
L14
BATCo document for Province of British Columbia 20
April 1999


'~XH1317 19
CIGARETTE CONSUMPTION
U. S. A.
C'G-'
7-,C
Goo
500
40 C
3 co
200
100-
9 80~-,j
!920 Ise: 1970
BATCo document for Province of British Columbia 20
April 1999


E , -i,=-:7 2 ~~
CANADA
RE-'L PRICE IN,-;-=x
sees
0
0
0000 104,
es 0
see*@ 000
BASIC PROPENS17Y (PER YEAR
-.000.*
5000
40 C0
3000
T
eso*
Z000
1000
tS-30 1940 1950 1960 7C ISSO
CD
tal:
U-4
BATCo document for Province of British Columbia 20
April 1999


14 C n
120
too
so
EAHia.7 ZE
U. S. A.
PRICE INDEX
BASIC PRCPENSITY (PER YEAR)
6000
0
5000
4000
3000
2000
1000
BATCo document for Province of British Columbia 20
April 1999


0
0
CL
0
CD
P+
0
CD
0
h
=r
0
0
75'
>
Fxil lit IT I
111411 CE ELASTICITIES AND CHOWTII TRENDS
EOIIATION (1)
(Long Lerin)
C C
CANADA
I"t)IIATION (2)
(Short
C,
1991 - 1982 -0.9/1 0.0% -1.2% 0. 7 1
1 TI 6 148 1?. Q 2. 6Z
Price Elasticity
Ivinual Growti, Trend Before 1969
Annual Growth Trend Frum 1969 Vil = Smokhig
propenslLy per inale adl,Ij* In
"
"
V() =
Ila s I,
sIllol'ing I'l,"i-fisilv ill v,-.1, 1)
I'll - Clgarel-l-e pricv Ill y,~jlj 11
P-, = Cigarette price Ill y,-ar (I
PROPOSED E'LASTICITIES FOR CANADA:
d
Sh
0
75
% v -
ort rerm:
.
Tel -0. 9
Average ammal mnobvi- q)(
inaivs III populal imi ;1j.,, `0 and
1.,.1l hw ~J- I. I I.,