![]() ![]() The degree of pass-through thus determines the effectiveness of the excise tax in reducing tobacco consumption (apart from the hypothetical cases in which demand or supply is perfectly price-inelastic). The magnitude of the price increase depends on the degree to which the tax increase is passed through to consumers. 1Īn excise tax increase typically increases the price of cigarettes. There is consensus in the literature that, despite the addictiveness of nicotine, an increase in tobacco prices does reduce tobacco consumption. Typically, smokers have no incentive to know the tax amount on cigarettes (and probably do not know the quantum of the tax), but they are made aware of the retail price at each purchase occasion. 1 People change their purchasing behavior in response to retail price changes, not in response to excise tax changes. The effectiveness of excise tax increases as a tool for reducing tobacco use depends on how the tax increase impacts the retail price of the product.
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