<mark>The estimation of price-elasticities of demand from household budget surveys can face several empirical challenges. In the absence of price data, the use of unit values to approximate the prices faced by consumers can suffer from simultaneity bias (Deaton 1990; 2018).</mark><sup>13</sup> <mark>If a good is available at different quality grades in the market but prices paid are unobservable, the unit price inferred from household expenditure is a choice variable, reflecting both the consumer’s decision of price, and her decision over quality. In the case of tobacco taxation, this could raise concerns over “quality shredding”, where smokers facing a higher tax could adapt by smoking lower-priced or lower-quality tobacco, rather than reducing smoking. With quality shredding, the elasticity of cigarettes (based on survey data) could overstate smoker responsiveness. The ECBA results could hence overestimate the changes in tobacco expenditure and the sensitivity of indirect effects to a tax reform. This result of quality shredding, however, should be</mark> established empirically for each particular commodity and context (Deaton 2018).

<mark>The methodology proposed by Deaton (1990) to correct for simultaneity bias is applied as a robustness check to the estimation of price elasticities of demand for cigarettes in Georgia. While the Deaton method has been widely applied to estimate the demand for tobacco products, calculations by income groups are limited. Estimations of own-price elasticities of filtered cigarettes using the Deaton methodology at the tercile- and quintile-level are presented in</mark> <u><mark>Table 4 and Annex 6. The overall distributional pattern of</mark></u> <mark>elasticities is consistent with the results in</mark> <u><mark>Table 3. Lower-income groups of the population are</mark></u> <mark>systematically more responsive to price changes in cigarettes. On the other hand, the sensitivity of these Deaton results in Georgia to the model specification calls for deeper investigation (see also Gibson and Kim</mark> 2016 and McKelvey 2011 for a discussion on the empirical limitations of the Deaton method).

Table 4. Estimates of price-elasticities of demand for filtered cigarettes, using the Deaton methodology

||1|2|3|4|5|
|---|---|---|---|---|---|
|Terciles|-0.62|-0.04|-0.05|||
|Quintiles|-0.74|-0.40|-0.33|-0.10|-0.27|

_Source_ : Authors’ estimation based on data from the IHS (2002-2016) and HIES (2017). _Notes:_ Income groups are created based on household per capita consumption, based on the ECAPOV harmonized aggregate by the World Bank. The Deaton method was adapted based on previous applications by Deaton (2018) and Chelwa et al. (2019). Clusters are aggregated at the year, region, and urban-rural level.

# VI. Smoking-attributable medical expenses, mortality and YWLL

## Tobacco-related medical expenses

The parameter for direct medical expenses from tobacco-attributable diseases in Georgia is taken from the estimations for 192 countries in 2012 by Goodchild et al. (2018). After updating the estimate for changes in the price level, total tobacco-related direct medical expenses are estimated at GEL 80.8 million in 2017. Additionally, taking the national share of out-of-pocket payments in total health care expenses (56 percent, from the WDI), it is estimated that households bear GEL 44.9 million in tobacco-related medical expenses.

> 13 In the common absence of price data from household expenditure surveys, unit values are calculated as household expenditure (amount paid), divided by quantity. To the extent that observations bundle together different goods or quality grades of the same good, unit values differ from prices paid. See Deaton (1990; 2018) for a comprehensive discussion on this issue and the proposed methodology to correct for simultaneity biases.

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