TY - JOUR AU - Gruber,Jonathan AU - Sen,Anindya AU - Stabile,Mark TI - Estimating Price Elasticities When there is Smuggling: The Sensitivity of Smoking to Price in Canada JF - National Bureau of Economic Research Working Paper Series VL - No. 8962 PY - 2002 Y2 - May 2002 UR - http://www.nber.org/papers/w8962 L1 - http://www.nber.org/papers/w8962.pdf N1 - Author contact info: Jonathan Gruber MIT Department of Economics E52-355 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-8892 Fax: 617/253-1330 E-Mail: gruberj@mit.edu Anindya Sen E-Mail: asen@watarts.uwaterloo.ca Mark Stabile School of Public Policy and Governance University of Toronto Canadiana Building, 3rd Floor 14 Queen's Park Cres. W. Toronto, ON M5S 3K9 CANADA Tel: 416/978-4329 Fax: 416/978-5079 E-Mail: mark.stabile@utoronto.ca AB - A central parameter for evaluating tax policies is the price elasticity of demand for cigarettes. But in many countries this parameter is difficult to estimate reliably due to widespread smuggling, which significantly biases estimates using legal sales data. An excellent example is Canada, where widespread smuggling in the early 1990s, in response to large tax increases, biases upwards the response of legal cigarette sales to price. We surmount this problem through two approaches: excluding the provinces and years where smuggling was greatest; and using household level expenditure data on smoking, where there is a downward bias to estimated elasticities from smuggling. These two approaches yield a tightly estimated elasticity in the range of -0.45 to -0.47. We also show that the sensitivity of smoking to price is much larger among lower income Canadians. In the context of recent behavioral models of smoking, whereby higher taxes reduce unwanted smoking among price sensitive populations, this finding suggests that cigarette taxes may not be as regressive as previously suggested. Finally, we show that price increases on cigarettes do not increase, and may actually decrease, consumption of alcohol; as a result, smuggling of cigarettes may have raised consumption of alcohol as well. ER -