Tobacco price elasticity in Serbia : Estimates of the prevalence and intensity elasticities and the effects increasing excises on the government revenues and consumption inequality

Vladisavljević, Marko and Jovanović, Olivera and Zubović, Jovan and Đukić, Mihajlo (2021) Tobacco price elasticity in Serbia : Estimates of the prevalence and intensity elasticities and the effects increasing excises on the government revenues and consumption inequality. In: International Economic Association "Equity, Sustainability and Prosperity in a Fractured World" : World Congress IEA, 2-6 July 2021. International Economic Association, Indonezija.

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Abstract

Consumption of cigarettes and other tobacco products in the Republic of Serbia as well as in the other countries in the Southeastern Europe region imposes a significant economic burden on households and society in general. The aim of this paper is to estimate the effects of the cigarette price increase through tobacco excise increases and their associated impacts on tobacco consumption, household expenditures, and tax burdens among different income groups as well as the impact of these increases on government revenues. Lack of the research and evidence-based findings about tobacco taxation in Serbia makes excise system less effective and cigarettes more affordable. Strong evidence-based research findings can help policymakers to bring new laws and protect the population from the harmful and unhealthy effects of tobacco consumption. Using individual data from Household Budget Survey for years 2006 to 2017 and implementing Two-Part model, we estimated the cigarette prevalence and conditional elasticities. Our results show that increasing excises and prices of cigarettes in Serbia would result in lower cigarette consumption, while at the same time an increase of the government revenues would occur. Further positive fiscal effects could be expected since the decrease of cigarette consumption would likely lower health expenditures related to the harmful effects of cigarettes. Considering these divergent consumer responses to cigarette price increases, increasing excises would actually be a pro-poor policy that has the potential to lower the consumption inequality in the country. Lower expenditures on cigarettes for lowincome households would likely be coupled with lower health expenditures related to harmful effects of cigarettes.

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