Price elasticity measures the sensitivity of consumers to changes in real prices, holding real income constant, while affordability elasticity measures the sensitivity of consumers to price changes adjusted for inflation and income changes. The existing scientific literature on tobacco demand abounds in both price and affordability elasticity estimates, without providing a clear explanation of the theoretical and policy implications of using one parameter over the other.
In recent research, Nigar Nargis from the American Cancer Society and her colleagues offer a guide to practitioners of tobacco taxation for evaluating the effectiveness of tax-induced price increases on tobacco consumption by estimating and comparing price and affordability elasticities for high-income and low-and-middle-income countries separately. They conclude that price elasticity alone can reasonably predict people’s response in using tobacco products to tax and price policy changes in stable income scenarios typically observed in high-income countries. On the other hand, affordability elasticity is a useful parameter to reflect the sensitivity of consumers to tobacco tax and price policy changes in the presence of significant income growth currently observed in many low-and-middle-income countries. Future research should heed these findings and use the appropriate elasticities to generate the most accurate research findings.
By Nigar Nargis
Cover Image Credit: WHO