Accelerating progress on effective tobacco tax policies in Montenegro

Abstract

BACKGROUND: The objective of this study is to estimate the sensitivity of cigarette quantity demanded to price and income changes in Montenegro. DATA AND METHODS: The sensitivity of cigarette quantity demanded to price and income changes was estimated using micro and macro analysis. Micro analysis implied the use of Deaton's model on Household Budget Survey data (2006-2017). In macro analysis, conventional static demand model is applied using error correction and autoregressive distributed lag time series methodology on annual time series aggregated data (2001-2017). RESULTS: The same results were obtained using micro and macro analysis which contributes to the objectivity of the conducted research. Results derived from the Deaton's model indicate a negative price elasticity of cigarettes in the range between -0.62 and -0.80 (conditional and unconditional), while in macro model estimated price elasticity is in that range and equals -0.68. Simulation results confirm the efficiency of excise tax policy changes, having an evident decrease in consumption and increase of public revenues. CONCLUSION: Analysis of the tobacco market and regulatory environment suggests that the increase of excise and other taxes on tobacco have an important direct impact on the reduction of cigarettes and other tobacco products consumption. Our estimates of long and short-run price elasticity show that direct impact is strong and very much in accordance with the results obtained so far for other low-income and middle-income countries. This paper gives a contribution to the analysis of price elasticity of demand for cigarettes, which was for the first time conducted in Montenegro.