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This paper estimates the price elasticity of tobacco demand using the macro time-series data on tobacco consumption in Korea covering 41 years from 1965 to 2004. Unlike the previous studies on price elasticity of tobacco demand in Korea, this paper finds that the price elasticity of tobacco demand i...

This paper estimates the price elasticity of tobacco demand using the macro time-series data on tobacco consumption in Korea covering 41 years from 1965 to 2004. Unlike the previous studies on price elasticity of tobacco demand in Korea, this paper finds that the price elasticity of tobacco demand is estimated to be significantly different from zero. After controlling the time trend and its square term, we find that the estimated price elasticity is -0.20 and -0.31, respectively for total tobacco demand and tobacco demand for domestic products. When the sample period is restricted to more recent period from 1988 to 2004, the estimated coefficients become larger to -0.50 and -0.79. Controlling for endogeneity of tobacco price by applying Ⅳ estimation using the tobacco taxes as Ⅳ leads to slightly smaller estimated elasticities, which still remain statistically significant at 1% level. Our empirical results imply that a 10% increase in tobacco taxes would lead to approximately 4.5% decrease in tobacco quantity demanded, indicating the potential effectiveness of tobacco taxes in decreasing tobacco consumption in Korea.

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