Analysis to estimate the price elasticity of demand for duty‐paid cigarettes in the UK.
HM Revenue and Customs Working Paper 9: Econometric Analysis of Cigarette Consumption in the UK
In the tax year 2009 to 2010 tobacco products generated close to £9 billion in tax receipts for the UK exchequer, around 2% of all receipts from taxation.
Taxation is the single largest component in the price of a packet of cigarettes and duty increases are generally passed on directly to the consumer in increased prices. When measured in terms of UK tax receipts, any duty increase will generate a direct and indirect effect. The direct effect is revenue positive: each packet of cigarettes sold will generate a higher amount of tax. The indirect effect is revenue negative: the increased price will tend to reduce the number of cigarettes that are sold or encourage customers to switch to products that generate less revenue.
The objective of this analysis is to estimate the price elasticity of demand for cigarettes in the UK. Given that the focus of HM Revenue and Customs is on receipts rather than consumption, it is the price elasticity for duty‐paid consumption that we are interested in.
An update to the analysis, which used more recent data, was published in 2015.