Price Elasticity of Demand for Tobacco Consumption in Eritrea: an Exploratory Study

Abstract

Smoking is a major cause of premature death and morbidity around the world. In Eritrea, the National Non-communicable Disease Risk Factors Baseline Survey of the Ministry of Health and WHO, conducted in 2005, noted that tobacco use is the main risk factor for non-communicable diseases such as respiratory infection, diabetes, cardio-vascular diseases and lung cancer in the country (8).This paper is an exploratory study into the sensitivity or responsiveness of increases in price of cigarettes on its consumption levels in Eritrea. The study used the Engle-Granger Ordinary Least Square (OLS) econometric modelling to estimate the (long-run) price elasticity of demand for tobacco. The model controls for per capita GDP, legislation for tobacco control (introduced as dummy variable) and past consumption. It is based on annual time series data from 1998 to 2012. The estimated long-run price elasticity of demand for cigarettes ranges from -0.8232 to -2.8122, with an average elasticity of -1.67. A comparison of the average price elasticity of demand for cigarettes in Eritrea with similar studies in other low- and middle income countries around the world reveals that the price elasticity of demand for Eritrea is more elastic. This could be attributed to the low income of people. As the demand is more price-elastic, increases in the prices of cigarettes could be more effective in reducing cigarette consumption. Seen from the point of the health benefits of overall reductions in cigarette consumption, the prices of cigarettes should be continuously monitored so that increases in prices of cigarettes (through increases in excise taxes) could be made to offset any future affordability of cigarettes due to increments in incomes in the population. The study could not assess the impact of increase in the prices of cigarettes on tax revenue due to data limitations.