Printing:

This poster is 48 wide by 36 high.

Its designed to be printed on a
large
Customizing the Content:
The placeholders in this
formatted for you.
placeholders to add text, or click
an icon to add a table, chart,
SmartArt graphic, picture or
multimedia file.
T
from text, just click the Bullets
button on the Home tab.
If you need more placeholders for
titles,
make a copy of what you need and
drag it into place. PowerPoints
Smart Guides will help you align it
with everything else.
Want to use your own pictures
instead of ours? No problem! Just
right
Change Picture. Maintain the
proportion of pictures as you resize
by dragging a corner.
INTRODUCTION
LITERATURE REVIEWED
DATA SERIES
RESULTS
RESULTS
CONCLUSIONS
The result from the Cointegration test shows that the data series do not have a
long-run equilibrating relationship. This makes sense because if we consider
factors such as the addictiveness of cigarette consumption and smokers income
level across time periods, cigarette demand do not necessarily need to move
together with prices.
Our CUSUM chart indicated a possible structural break at or before April 2007.
The short term forecasts are also very close to the actual values. This could
suggest that the effect of the tax increase on smokers became more pronounced
six years after the tax and price increase confirming initial evidence from Becter
and others that the long-run effect of cigarette price increase exceeds its short-run
effect. So government tax policies aimed at reducing cigarette consumption might
not be as effective as desired in the short-run. The best option to reduce cigarette
consumption in the short-run is to totally ban its production and sales.
From the plot above, we can see an increase in the average retail price of cigarettes
in 2001. This is precisely in March when the act that enacted an overall increase in
the excise tax on cigarettes was in process to becoming a binding policy. Cigarette
companies anticipated this policy and increased the prices of cigarettes.
According to the United States National Institute on Drug Abuse, On average, adults who
smoke die 14 years earlier than non-smokers. (NID, December 2012).
Smokers in countries such as Canada with almost free health care programmes usually cause
more liabilities to the countries. So such countries resort to policies such as increased taxes on
cigarette production and sales in order to reduce the demand for the good while, at the same
time, increasing the awareness of smokers to the various health effects of smoking through
cigarette packet labels.
In June 14, 2001, a tobacco tax amendment act was assented in Canada. The act increased
excise taxes on tobacco sticks by $1.00 per 200 sticks nation-wide (JLW, 2014). Also, in the same
month of 2001, Canada initiated and implemented the use of picture-based health warnings on
cigarette packages (TLRC, 2014).
Cigarette taxes are usually excise taxes. Excise taxes are considered indirect taxes, meaning that
the producers or sellers who pay the taxes to the government are expected to recover the tax
by raising the price paid by the buyers.
So, for the purpose of this research, we will work with the assumption that any increase in
cigarette excise tax will translate to equal increase in the price of cigarettes.
Below is an example of a cigarette packet label.
For this research, we will be using two data series from CANSIM Statistics
Canada. The first series is a monthly data on the average retail price of cigarettes
(per 200 sticks) from January 1995 to January 2014. The second series is also a
monthly data on the total sales of cigarettes in Canada (x1000) from January
1995 to January 2014.
Here, we will impose the neoclassical market clearing equilibrium model that
cigarette supply equals cigarette demand. This even makes intuitive sense as
cigarettes do not get spoilt.
SUGGESTIONS FOR FUTURE RESEARCH
First, Engle granger test for cointgration to see if the series have a long-run
equilibrating relationship.
Second, we will use a CUSUM chart and a Chow test to determine if there was a
structural break in the series for total sales of cigarettes after the tax and price
increase.
Lastly, we will try and forecast one year observations after the major price
increase with previous observations and compare our forecasts with our actual
data to see if there was a major difference between our forecasts and the actual
data as a result of the price increase.
The correlogram from gretl for the differenced total sales series (Yt) identifies our
ARIMA forecast model to be AR(2): Yt = -6.86 - 0.63 Yt-1 0.45 Yt-2. The
parameter estimates are both significant.
The table below shows 12 months forecasts of total cigarette sales from march
2001 to march 2002.
The long-run Effect of Taxes on the Demand for Cigarettes in
Canada
By Aminadoki Tamuno-omie Holy (7691959)
The CUSUM chart above shows that the series of the total sales of cigarette has
a structural break at or before April 2007. However, we are more interested in
checking whether there is a structural break in 2001 as a result of the excise tax
increase
A chow test of the series testing the null hypothesis of no structural break in
March, 2001 gives us a p-value of 0.0045658. This p-value is significant at the
5% level leading us to conclude that there is a structural break at or before
march 2001.
METHODS
Actual value (Xt) Forecast of differenced series (Xt+1) Predicted values (Xt+1= Xt - Xt+1)
3883 0.13 3882.87
3704 0.05 3703.95
2877 1.46 2875.54
3585 0.94 3584.06
4375 1.12 4373.88
3528 0.26 3527.74
3324 0.31 3323.69
3653 0.17 3652.83
3421 0.25 3420.75
3427 1.8 3425.2
3239 0.63 3238.37
3242 1.13 3240.87
3378 0.31 3377.69
First is by Garry Becker, Michael Grossman, and Kevin Murphy in 1994. They test
the model of rational addiction considering the price elasticity of cigarette
consumption. They find out that 10-percent permanent increase in the price of
a cigarette reduces cigarette consumption by 4 percent in the short run and by
7.5 percent in the long run (Becker, et al, 1994). Thus, the long-run responses of
smokers to price changes exceed short-run responses.
The second is by Chaloupka, Cummings, Moley, and Haran in 2002. They find
out, from the evidence tobacco companies provided, that tobacco control
efforts that aim at raising tobacco prices and limiting price related marketing
efforts achieve reductions in tobacco use (Chaloupka et al, 2002).
The last one is by Jerome Adda and Francesca Cornaglia in 2006. Adda and
Cornaglia estimate the behaviour of smokers to compensate for increases in the
price of cigarettes caused by tax hikes. They used data on the number and type
of cigarettes smoked and the cotinine concentration measured in large amount
of smokers in the United States to show that smoking intensity increases by
0.4% for every 1-percent increase in taxes (Adda and Cornaglia, 2006). In other
words, in order to compensate for a price increase and a decrease in number of
cigarettes bought, smokers smoke a given cigarette more intensively. In this,
they show that economic studies in the past that have advocated higher excise
taxes to discourage smoking, by ignoring compensatory behaviours of smokers,
have had their studies bias in the estimation of the rational addiction model.
Estimate the impact of smokers income level on cigarette consumption
Estimate the rational addiction model of cigarette consumption using current data.
When we conduct ADF Unit Root tests on the data series with the model, it is
shown that the series are both not stationary at the level data but stationary at
first difference (d=1 in both). Thus, we will conduct most of our analysis on the
first differenced series.
Cointegrating Regression: Sales = 4813.90 23.2533 Avg Retail Prices
The asymptotic p-value of our cointegration analysis is 0.4697. This is not
significant at the 10% level of significance. We will fail to reject the null
hypothesis that there is no cointegration and conclude that our data series do
not have a long-run equilibrating relationship.
2000
2500
3000
3500
4000
4500
5000
1996 1998 2000 2002 2004 2006
Total_Cigarette_Sales
forecast