According to the Scientific Committee on Tobacco and Health (1998), the overall conclusions on the UK Market, included that demand for cigarettes in the UK is strongly influenced by price, advertising and promotion while prevalence of smoking in the UK is increasingly associated with factors of social and economic deprivation.
Tobacco demand does respond to normal laws of supply and demand. WHO suggests tobacco price elasticities of –0.4 for high-income countries and –0.8 for low and middle-income countries (Chaloupka, 1999). The price elasticity is the ratio of change in demand for a given change in price – thus a price elasticity of –0.4 means that a ten percent rise in price will cause a four percent drop in consumption, all other things being equal. The researchers for WHO calculated the effect of a 10% global price rise. For the 1995 population, they conclude:
… 40 million people worldwide would quit smoking, and many more who would otherwise have taken up smoking would be deterred from doing so. Given that not all quitters would avoid death, the number of premature deaths avoided is still extraordinary by any standards -10 million or 3 percent of all tobacco-related deaths - from this price increase alone. Nine million of the premature deaths avoided would be in developing countries, of which 4 million would be in East Asia and the Pacific
However, it should be pointed out that when people's incomes increase faster than the price of cigarettes, people can afford to buy more cigarettes - that is, the 'affordability' of cigarettes goes up, which can reduce the incentive to give up smoking, in return (Royal College of Physicians of London, 1995).
Source: ONS Labour Market Trends/Economic Trends
However, cigarettes are still over 60 per cent more affordable now than in 1965.
Source: WHO Tobacco Control Report, 2002
Concluding, the relatively elastic demand means price increases are likely to reduce tobacco consumption amongst the poor more proportionately than in the case of the rich. Such changes are effective only at the margin, meaning that increasing the price of cigarettes and not the price of other substitute tobacco products will in all probability lead to a ‘substitution effect’ with little or no public health gains.
In many countries, including the UK, governments impose sales (or excise) taxes on cigarettes, which can have an effect on the market for cigarettes. Research shows that the demand for tobacco products is related to their price. As prices rise, demand falls. So high tax levels are one important means of reducing tobacco consumption. High tobacco prices are also a deterrent to children tempted to take up smoking. The real price of tobacco - that is, after allowing for inflation - has increased significantly in recent decades. But people's real incomes have also risen.
Tax - that is, duty and VAT - currently accounts for almost 80% of the price of a packet of cigarettes. Cigarette tax at a high level in the UK so that the price of cigarettes in the shops will be high. This acts as an incentive to smoke less.
Source: WHO Tobacco Control Report, 2002
UK government policy towards tobacco taxes has remained largely unchanged since the Conservative government introduced the so-called escalator tax in the early 1990s, and the Labour administration, which took power in 1997 and was re-elected in 2001, has continued this policy with above inflation annual increases on tobacco taxes effectively becoming the norm. As such, the UK tobacco sector is one of the most heavily taxed in the world, and UK cigarette prices are the highest in the EU, with taxes accounting for around 84.5% of the retail cost of a typical packet of cigarettes.
Most studies of the impact of taxation on cigarette consumption have been based on a single-equation demand model that is designed to test the responsiveness of cigarette consumed to cigarette price. Such a model assumes that the cigarette industry is perfectly competitive and that supply is perfectly elastic so that excise tax changes will be fully reflected in cigarette prices (Lewit and Coate 1982). Evidence suggests, however, that the cigarette industry is not perfectly competitive and that when cigarette taxes rise, prices have often risen by more than the amount of the excise tax increases (Barzel 1976; Sumner 1981; Applebaum 1982). Bishop and Yoo (1985) apply a neoclassical system-wide approach to build a static simultaneous demand and supply model for cigarettes. Though they relax the assumption that supply is perfectly elastic, they assume a perfectly competitive industry with a one-to-one correspondence between price and quantity supplied. They define the cigarette supply to be a function of cigarette price, input price index, and other supply-side exogenous variables. They find that the cigarette supply equation is elastic and the cigarette demand equation is inelastic. Porter (1986) also considers the simultaneity of demand and supply for cigarettes. Both Bishop and Yoo and Porter ignore the addictive nature of cigarette smoking in their models. Kao and Tremblay (1988) modify Bishop and Yoo’s model by including a lagged consumption variable in the demand equation to account for the habit-forming nature of cigarette smoking.
Source: World Bank (1999) – p. 39
Overall, the UK Government earned £9,616 million in revenue from tobacco in 2000, and more specifically £7,760 million in tobacco duty and £1,856 million in VAT. Tax is levied on tobacco in three ways: specific excise duty at a rate per 1000 cigarettes, an "ad valorem" excise duty which is 20% of the total retail price, and VAT at 17.5% of the price including the other taxes. Almost 80% of the price of a packet of cigarettes consists of taxation. After the March 2001 Budget, the recommended retail price of 20 premium brand cigarettes was £4.33, of which £3.43 was tax. Thus, the price of cigarettes has a major effect on cigarette consumption and higher tobacco taxes reduce smoking and smoking related sickness as people cut down, stop smoking, or never start because of the high cost, while public opinion is largely in favour of increased taxation, according to various opinion polls.
The Government believes it has taken a number of important steps over smoking. However, further action is now necessary if smoking is to be reduced, and health in Britain improved. Because of the high taxation of cigarettes, governments are sometimes accused of exploiting smokers, with the charge made particularly in relation to smokers who are less well off, because tax and price increases hit most heavily those who spend the highest proportions of their income on tobacco.
Governments in the developing countries, such as the UK, have ample latitude to increase tobacco taxation and have gains with respect to fiscal revenues as well as public health insofar as higher taxes raises the price and hence lowers the consumption of tobacco products. In almost all countries for which data are available, increases in tobacco taxes have led to a rise in fiscal revenues. The explanation lies in the inelasticity of tobacco consumption, caused mostly by the addictive properties of the substance. Of course, taxes cannot continue to rise indefinitely without affecting consumption at some point. But given the low base of tobacco taxes in almost all the developing countries, and taking into account the demand inelasticities, there is much scope for sustained tobacco tax increases in the developing world.
Following tobacco taxation, the next most important form of government intervention in reducing demand for tobacco products is comprehensive bans on tobacco advertising. As documented in the WHO report, bans on advertising are effective in reducing tobacco consumption. The most significant aspect of comprehensive bans on tobacco advertising is the fact it effectively de-glamorises smoking. This is vital for creating a coherent milieu in which particularly the children and the youth are given a consistent message about the society’s perception of smoking. Further reinforcement measures are needed in the form of awareness programmes based on scientific and educational research.
Closely related to these issues of government intervention is the question on whether consumers are well informed and rational, and whether smokers know their risks. It is often argued that banning tobacco advertising could mark the beginning of government encroaching on socio-democratic norms in the society. The tobacco industry and its sympathisers make a big issue out of this ideological point in the developing countries. What is often forgotten is that in the developed countries such arguments seem to arise in an inverse context. In other words, because of the very democratic norms, espoused by the society, governments in the developed countries introduce stringent measures to provide a better living conditions for all; something which may well entail a reduction in absolute individual freedoms. Such curtailments could range from the speed limits on the roads to ban on smoking in public places, or a comprehensive ban on tobacco advertising as adopted by the European Union in 1998 and is to come to full effect by October 2006. Surely, the population of the developing countries deserves a similar benefit of democratic values. Allied with democratic values is the overarching issue of human rights, embodied in the WHO constitution which states that The enjoyment of the highest attainable standard of health is one of the fundamental rights of every human being without distinction of race, religion, political belief, economic or social conditions.” (Leary, p.2)
However, given the irrefutable addictive nature of the product, it has to be asked: What happens to the human rights of someone who has been enticed via sophisticated advertising and led to smoking addiction in a young age? It is with regard to children and the youth that the ‘human right to health’ is of particular relevance for the global tobacco control initiatives and for government to intervene in the market for cigarettes towards the best interest and well being of the consumer.
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