The elasticity of tobacco demand in Australia

Abstract

This paper examines the elasticity of demand of tobacco products in Australia from 2000 to 2011. The hypothesis is that the demand for cigarettes is inelastic. The alternate hypothesis is that the demand for cigarettes is elastic. The hypothesis implies that increasing tobacco tax decreases government tax revenue, while the opposite is true for a decrease in tobacco tax. This paper obtains data mainly from Australian Bureau of Statistics and Cancer Council Victoria. We find an increase in the excise rate and government revenue from tobacco products, therefore implying that the demand of tobacco products in Australia is inelastic. We find further support of this finding by examining factors such as the age and income structure of the population.