The Review of Economics and Statistics
A dynamic demand for cigarette consumption is estimated using pooled data of 46 states over the period 1963 to 1980. A Price elasticity of -0.2 and an insignificant income elasticity is found using pooled estimation techniques. The “bootlegging” effect is modeled explicitly using “neighboring” price. The effect is found to be significant. Two major policy issues are analyzed in light of these new estimates: (1) Cigarette taxation is found to be an effective tool for generating revenues even though there may be spillover effects to neighboring states where bootlegging is significant. (2) The effects of the Fairness Doctrine Act and the advertising ban on cigarette consumption are re-examined. We find mild support for the effectiveness of subsidized and anti-smoking messages in reducing cigarette consumption, and no support for the thesis that the ban on advertising helps to increase per capita consumption.