1. The role of tobacco price on consumption
Dr. Corné van Walbeek
Senior Lecturer, School of Economics
University of Cape Town

2. Two important principles of economics
The law of demand
As the price of a commodity increases, people are going to consume less of the product, all other factors held constant
By how much will consumption decrease? Not specified
Price elasticity
By how much does consumption decrease if the price increases by one per cent?
Distinguish between relatively elastic (ε > 1) and relatively inelastic (ε < 1) demand

3. More about price elasticity
If price elasticity = 0.6,
For every 1 per cent increase in price, consumption decreases by 0.6 per cent
For a 10 per cent increase in price, consumption decreases by 6 per cent
Estimates of price elasticity around the world:
Developed countries (ε of about 0.4)
Developing countries (ε between 0.4 and 0.8)
South Africa (ε between 0.6 and 0.8)
Chaloupka and Jha, 2000 and Van Walbeek, 2005

4. How does this work in practice?
Higher prices:
discourage smokers from starting to smoke
encourage some smokers to quit
reduces the average number of cigarettes smoked by smokers
Based on SA data, a 10 per cent increase in cigarette prices reduces cigarette consumption by about 6 per cent
Number of smokers decreases by about 3 per cent
Average consumption by remaining smokers decreases by about 3 per cent
Van Walbeek, 2005

5. Trends in cigarette consumption and smoking prevalence
1993
2003
Cigarette consumption (millions of packs)
1802
1210
Per capita consumption (packs p.a. aged 15+)
72.6
40.6
Smoking prevalence percentage (15+)
32.6
23.8
Average consumption per smoker (packs p.a.)
223
163
Van Walbeek, 2005

6. Which demographic groups are most affected by excise tax increases?
International experience:
Price elasticity of demand among youth is 2-3 times higher than among adults
Poorer groups are more price sensitive than richer groups
Changes in South African smoking prevalence
1993
2000
Change
Male
51.4%
43.8%
-7.6%
Female
12.9%
11.7%
-1.2%
Aged 16-24
24.0%
18.7%
-5.3%
Aged 50+
23.4%
22.5%
-0.9%
Lowest income group
29.4%
23.5%
-5.9%
Highest income group
28.1%
31.0%
+2.9%

7. The South African experience

8. The role of government Government imposes excise and other sales taxes
Industry passes the higher tax onto consumers in form of higher retail prices
Total tax burden as a percentage of the retail price
Country
Tax burden
Israel
84%
Ghana
63%
Zimbabwe
38%
Norway
81%
Japan
61%
Cameroon
33% UK
80%
South Africa
52%
Nigeria
32%
Australia
77%
Ethiopia
50%
Uganda
Spain
75%
Mozambique
48%
Congo Rep.
Netherlands
73%
Malawi
47%
Namibia
21%
Yurekli, unpublished data

9. How high should the tax burden be?
World Bank guideline:
75 per cent of retail price
European Union rule:
At least 57 per cent of retail price

10. The government benefits hugely from increases in the excise tax

11. The role of the industry:
An unlikely “ally” in the fight against tobacco

12. Conclusion Despite its addictiveness, tobacco obeys the law of demand
In most developing countries a 10 per cent increase in retail price reduces consumption by 4 – 8 per cent
Government is able to influence the price by raising the excise tax
In SA (and many other countries) industry typically pass more than the tax increase onto consumers