Taxation, smuggling and demand for cigarettes in Canada: Evidence from time-series data

Abstract

This study analyzes Canadian cigarette consumption and taxation between 1980 and 1994, a period in which there have been large price rises and declines, and a dramatic increase in the consumption of contraband tobacco products. We examine elasticities of legal cigarette sales and total sales (including contraband) with respect to the price of legal cigarettes and various other factors. The growth of the contraband market since 1987 appears to have created two classes of cigarette - taxed and untaxed - with responses to changes in the legal price that are respectively higher, and lower, than was previously the case. The sensitivity of total cigarette sales to the taxation instrument is much lower than it would appear from sales of taxed cigarettes alone.