An economic analysis of tobacco demand in Sri Lanka
Publication Source

Sri Lanka Economic Journal

Journal article
South-East Asia
Economy status
Lower-middle-income economies

This paper estimates price and income elasticities using a two-part demand model for households in different economic conditions in Sri Lanka. These estimates are then used to examine the effect price and income has on
tobacco demand in the country for households from different expenditure quintiles. The results show that price has a strong effect on tobacco consumption. The total price elasticity of demand is -0.29 in the richest expenditure quintile, while it varied between –0.55 and –0.64 among the other four expenditure quintiles. The results of the income elasticities of demand are relatively weak and mixed. A simulation exercise carried out showed that for the overall sample, household expenditure on tobacco is a maximum at a price level 44 per cent higher than the current level. These estimates imply that tobacco price increases –up to 44 per cent –through tax increases lead to a revenue increase for the government, while decreasing tobacco prevalence in the country.