CDC study says cigarette price hike would cut demand

ATLANTA (Reuters) -- A 50 percent increase in cigarette prices would cut overall consumption by 12.5 percent, with even greater declines in smoking among minorities and young adults, federal health experts said Thursday. The Centers for Disease Control and Prevention (CDC) said a statistical analysis of smoking habits since 1976 suggested that raising cigarette prices by 50 percent would result in about 60 billion fewer cigarettes smoked per year

Increasing the price of cigarettes by 50 percent would cut consumption by 7 percent among Caucasian-Americans, 16 percent among African-Americans and almost 95 percent among Hispanic-Americans, the CDC's mathematical model predicted. "If there is a price increase, there will be much more of a decline in consumption among minority groups than there will be among Caucasian-Americans," said Michael Eriksen, director of the CDC's Office on Smoking and Health. The agency said that for sampling and statistical reasons, the estimated huge reduction in smoking among Hispanic-Americans was subject to greater error than the figures for Caucasian-Americans or African-Americans. The study was based on national cigarette price and sales figures and a National

Health Interview Survey of 355,246 people, almost one-third of them smokers, conducted between 1976 and 1993.

Younger Hispanic-Americans may be more likely to quit

"We really don't think a 50 percent price increase would eliminate smoking in Hispanic-Americans. It might virtually eliminate it in some younger Hispanic-Americans," said Terry Pechacek, a visiting scientist at the Office on Smoking and Health. The CDC said younger smokers would be more likely than older smokers to quit or reduce the amount they smoked because of price increases. The study predicted a 50 percent price increase would cause consumption to decline 29 percent among those aged 18 to 24. Researchers said price increases would also lead to declines in smoking among African-Americans and Hispanic-Americans above age 25. "The tobacco industry has been trying to scare the public, saying that a price increase would be unfair and hit minorities the hardest. In fact, it will actually have the greatest benefit from a public health standpoint in minority communities, particularly in the Hispanic community," Eriksen said.

'Price is only one weapon'

Smokers whose family incomes were at or below average were more than five times as likely as higher-income persons to quit smoking because of price hikes.

Researchers said that even after controlling for income and other factors, Hispanic-American and African-American smokers were more likely than Caucasian-American smokers to quit because of price increases. The study said a 10 percent price increase would prompt one-fourth of Hispanic smokers aged 18 to 24 to quit and reduce consumption among African-Americans aged 18 to 24 by 10 percent. Smoking would be expected to drop less than 1 percent among young Caucasian-Americans, the CDC said. Eriksen said the relative lack of price sensitivity among Caucasian-Americans indicated that "price is only one weapon in an effort to reduce smoking." "You need to combine price increases with regulations, with education and prevention programs, and cessation. Any one element alone will fall short in achieving the type of change that's possible," he said.

a. According to the Center for Disease Control and Prevention (CDC) Study discussed in the CNN article above, what is the overall price elasticity of cigarettes? Based on the estimated elasticity value, is the demand for cigarettes elastic or inelastic? Does this accord with your expectations? Explain why.

b. What are the CDC estimates of price elasticity for Caucasian-Americans, African-Americans and Hispanic-Americans?

c. Age seems to be a relevant factor for responsiveness to cigarette price increases. What is the estimated price elasticity for young people (aged 18 to 24)? Is this higher or lower than the overall price elasticity calculated in (part a) above? Does this accord with your expectations? Why or why not?

d. The CDC study also presents information for estimates of price elasticity for young Hispanic-Americans, young African-Americans and young Caucasian-Americans. Calculate the elasticities for each of these three groups, and comment on whether they are elastic or inelastic.

e. Which of the factors that determine elasticity can be identified in the CDC study as being influential in causing differences in the observed elasticity across ethnic groups and age of consumer?

f. The government has taxed the cigarette industry quite extensively over the past decades. According to your analysis thus far, why would the government be so inclined to tax tobacco?