Price Elasticity of Demand for Cigarettes and Alcohol in Ecuador

ABSTRACT

Objective: Estimate price elasticity of demand for cigarettes and alcohol in Ecuador using cross-sectional data from the National Survey of Urban and Rural Household Income and Expenditures (ENIGHUR, Spanish acronym) 2011-2012.

Methods: ENIGHUR 2011-2012 data were used with Deaton’s (1, 2) methodology to estimate price elasticity of demand for cigarettes and alcohol with expenditure and quantity information. Household socioeconomic variables were also included.

Results: Price elasticity of demand for cigarettes is -0.87, meaning that a 10% price increase could lead to an 8.7% decrease in consumption. Results for cross-price elasticities of alcohol on cigarette demand are negative, as expected, indicating that they are complementary goods; however, the results are not statistically significant. Furthermore, it was found that price elasticity of demand for alcohol is -0.44, meaning that a 10% increase in the price of alcohol would produce a 4.4% decrease in consumption.

Conclusions: A policy of price increases––for example, through a tax increase––applied to both cigarettes and alcohol could have a positive effect on public health through reductions in consumption of both goods. However, this measure would not be sufficient to bridge gaps in prevalence measures and health outcomes between sex and other population groups, given the observed difference in the sensitivity of consumption to price variations.