The indirect costs of smoking on household welfare may include losses in labor incomes because of lower productivity or working days forgone because of illness, as well as the value of lives prematurely lost because of tobacco (WHO 2011b). Hence, raising the prices of tobacco may expand the years of productive life. Verguet et al. (2015) analyze the health effects of a price increase in China and conclude that a 50 percent rise in prices would result in 231 million life years gained over 50 years and would have a significant impact among the poor. In contrast, Pichón-Riviere et al. (2014) estimate that tobacco use in Chile would reduce life expectancy by nearly 4.0 years among women and 4.3 years among men. Ahsan et al. (2013) estimate that, if taxes were raised to 57 percent of the retail price of tobacco products, 1.96 million tobaccorelated deaths would be averted in Indonesia. Similarly, if taxes were raised even more, to 70 percent, more than 5 million deaths would be averted.

Other indirect and second-round effects may also be significant. Raising taxes on cigarettes may reduce exposure to secondhand smoke, with significant health and economic benefits.<sup>4</sup> Households may likewise benefit from increased public expenditure because governments have typically earmarked tax revenues from tobacco sales for health care and social programs.

# **3. Model**

The empirical model of this study relies on an adaptation of the extended ECBA methodology developed by Pichón-Riviere et al. (2014) and Verguet et al. (2015) to assess the medium- and long-run effects of raising taxes on cigarettes. Lower-income households tend to allocate larger shares of their budgets to purchase tobacco products (see above). Hence, relative to wealthier households, low-income families tend to face larger direct negative shocks to their budgets as taxes translate into higher prices for tobacco. Nonetheless, by discouraging consumption, taxes reduce adverse tobacco-related health outcomes, as well as the associated medical and human capital costs to households and societies. Medical treatment of tobacco-related chronic diseases swells annual health care costs among public health care systems and households (Marquez and Moreno-Dodson 2017). Smoking reduces household earnings potential and labor productivity, negatively affecting human capital accumulation and development (WHO 2015b).

Hence, the ECBA methodology incorporates three effects of rising tobacco prices: (a) the direct price shock on household budgets, (b) the reduction in direct medical expenses because of less widespread tobacco-related illness, and (c) the gains from preventing premature tobacco-related deaths among the working population.

An important assumption of the model is that the health effects of tobacco-related diseases will immediately diminish with the reduction in tobacco consumption. Even though this assumption is implausible in the short term because changes in the effects of tobacco-related diseases take some time to materialize, it provides a medium- and long-term estimate of the effects of tax increases.

The aggregate effect of a tax policy is estimated as indicated in figure 1.

> 4 Exposure to secondhand smoke is associated with a variety of respiratory diseases (HHS 2004). In the United States, the annual costs associated with such exposure are estimated at US$5 billion in direct medical bills and over US$5 billion in indirect medical costs (disability and forgone wages) (Behan, Eriksen, and Lin 2005).

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