The price of cigarettes to consumers in Mexico, and Latin America in general, remains low in comparison with other regions of the world. In Mexico, taxes represented 59% of the total price of cigarettes in 2006, compared to 75% or more in many high-income countries. The feasibility of raising taxes on cigarettes in Mexico—to both discourage consumption and increase revenues—is an important policy question.
Using household survey data, we undertake a pooled cross-sectional analysis of the demand for cigarettes in Mexico. We use a two-part model to estimate the price elasticity of cigarettes. This model controls for the selection effect that arises from the fact that the impact of price on the decision to smoke or not is estimated using all households in the dataset.
The results indicate that price is a significant factor in household decisions concerning smoking and the number of cigarettes smoked. Holding other factors constant, our simulations show that a 10% increase in the cigarette tax in Mexico—calculated as a percentage of the price—yields a 12.4% increase in the price to the consumer, a 6.4% decrease in consumption of cigarettes and a 15.7% increase in the revenue yielded by the tax.
In Mexico, there are strong arguments for increasing cigarette taxes. Revenue raised could be used to further prevent tobacco consumption and to finance current funding shortages for the treatment of diseases related to smoking.