South Africa’s low price elasticities may also be explained by the country’s experience with tobacco control policies and the changing structure of the tobacco market in 2010. Moreover, these estimates likely capture the illicit cigarette market. Following the profound changes produced by tobacco legislation, smoking prevalence decreased by over 10 percentage points. People who continued to smoke are probably more addicted and possibly less sensitive to price changes.<sup>32</sup> To test our hypothesis, we applied the tobacco price elasticities by income quartiles estimated by van Walbeek (2002b) to these simulations.<sup>33</sup> These elasticities are much higher than the ones used in this study (−0.25 versus −1.1) and were also estimated at a time when smoking prevalence was significantly higher in South Africa. As of 2015, less than a fifth of households report spending money on cigarettes, compared with over 40 percent in 1995.<sup>34</sup> As expected, the results of a tobacco tax increase using higher elasticities, such as that of van Walbeek (2002b), indicate a positive and highly progressive effect of an increase in tobacco prices, one that, in magnitude, is larger than the results presented in table 12 (see annex F for simulation results). Overall, tobacco tax increases have a small effect in the presence of a low tobacco price elasticity. Thus, a population that is not as sensitive to tobacco price changes, as is the status quo in South Africa, will not reduce consumption sufficiently to experience even more gains from the health and work benefits.

In Chile, Moldova, and Ukraine, the authors find evidence that tobacco price increases are also a progressive policy in favor of low-income groups (Fuchs and Meneses 2017a, 2017b, 2018). Nonetheless, these countries present much higher smoking prevalence rates and higher tobacco price elasticities than South Africa and do not have the same history of substantial tobacco control policies.<sup>35</sup> These low price elasticities indicate that a uniform increase in tobacco taxes should not be the only policy in place to reduce tobacco consumption in South Africa further.

In addition, we hypothesize that limited data availability on the medical costs of tobacco-related diseases accounts for a lower-bound estimate of the potential benefits of reduced medical expenses. The medical costs of treating tobacco-related diseases must be investigated further in South Africa to have more accurate estimates of the distributional effects of tobacco taxation in the country. Similarly, Pillay-van Wyk et al. (2016) indicate that mortality by disease is severely underreported in the South African data, presenting yet another lowerbound indicator for estimating aggregate wealth effects. Moreover, most low-income households in South Africa still have very limited access to specialist care; when they get cancer, heart attacks or strokes, they simply perish with little or no care. Thus, the impact of increased life expectancy and reduced morbidity would probably be much more significant than the impact of medical costs reductions for the poor.

These three factors combined highlight that more research is needed if we are to understand the distributional effects of tobacco taxation in South Africa.

> 32 Since the paper uses reported (expenditure on tobacco) prices, total elasticity for the different deciles cannot be estimated. Thus, the price elasticities in this paper are conditional elasticities.

> 33 Van Walbeek (2002b) uses the Income and Expenditure Survey of 1990 and 1995 and applies the same aggregate price across all households to estimate elasticities by income group.

> 34 Estimates using the 1995 and 2015 Income and Expenditure Survey.

> 35 Smoking prevalence among adult males in Chile was 40.0 percent in 2015, 45.7 percent in Moldova, and 49.4 percent in Ukraine, compared with only 31.0 percent in South Africa. See WDI (World Development Indicators) (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi.

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