Evaluating Cigarette Demand Models

In the past 15 years there has been a substantial increase in the taxation of cigarettes in the United States. The federal government and most state governments have increased taxes on cigarettes in an effort to reduce smoking. In the period 1990-2003, the national average price of cigarettes increased by 85%. This paper will use data from 1990-2003 to examine the effect that these large price increases have had on cigarette consumption. For the standard non-addiction cigarette demand model I obtained an elasticity of roughly -.5 and for the rational addiction cigarette model I obtained a long-run price elasticity of roughly -.6. *[email protected] I would like to thank Kevin M. Murphy, Gary S. Becker, Casey Mulligan, and my instructor Kenneth West for their insight and helpful comments.