Because of the addictive nature of smoking, economic theory predicts that changes in behavior in response to changes in price will not occur quickly, as it would for the use of nonaddictive goods, but that the effects of permanent price changes will grow gradually over time. What We Know Several clear conclusions have emerged from the large and growing number of econometric studies of the demand for cigarettes and other tobacco products. Permanent, inflation-adjusted increases in cigarette prices, which could be achieved by increasing cigarette taxes, will lead to significant reductions in cigarette smoking. The reductions in smoking resulting from increased prices are not limited to reductions in the number of cigarettes smoked, but also include significant reductions in smoking prevalence. Recent estimates imply that a 10-percent increase in price reduces smoking prevalence by 1 to 2 percent, while reducing the duration of the smoking habit by approximately 10 percent.
Cigarette smoking is clearly addictive in that current cigarette demand depends on past smoking.
The most important policy implication of this is that the long-run impact of a permanent price increase or change in tobacco control policy will grow over time. Economic theory and several recent empirical analyses imply that the price sensitivity of youth cigarette demand is inversely related to age, in part due to the addictive nature of cigarette smoking. Recent estimates indicate that youths are up to three times more sensitive to price than adults, with a 10-percent price increase reducing youth smoking prevalence by up to 7 percent while also reducing cigarette consumption among continuing young smokers. Other tobacco control policies, particularly increased information on the health consequences of smoking, strong restrictions on cigarette smoking in public places and private workplaces, and counteradvertising campaigns, lead to significant reductions in overall cigarette demand and smoking prevalence. Tobacco products appear to be substitutes for one another.