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Is Illicit Tobacco Demand Sensitive to Relative Price?

Authors


  • This research was funded under the Australian Research Council Discovery Grant DP0662751. The authors are grateful to the Hunter Valley Research Foundation for its flawless execution of the telephone survey used in the analysis. We also thank Breanna Pellegrini for invaluable research assistance.

Correspondence: Tim R.L. Fry, School of Economics, Finance and Marketing, RMIT University, GPO Box 2476V, Melbourne, VIC 3001, Australia. Email: tim.fry@rmit.edu.au

Abstract

A tough fiscal stance has become the norm for discouraging tobacco consumption. Tax and excise rises serve to increase the price of licit relative to illicit tobacco. Consequently, there has been a rise in black market tobacco consumption. This article investigates the degree of substitution between licit and illicit tobacco using novel survey data. We find that illicit tobacco smokers are sensitive to the price ratio between licit and illicit tobacco. This implies that high tobacco taxes have spillover effects that need to be accounted for in policy evaluation.

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