Tobacco demand elasticity and fiscal policy- the case of Albania

Tobacco demand elasticity and fiscal policy- the case of Albania data

Aida Gjika, Klodjan Rama, Edvin Zhllima, Drini Imami

Abstract: Albania is one of the countries with highest smoking prevalence in Europe. Despite the seriousness of the smoking phenomena, there has been limited research on the smoking behavior including also determinant factors. Accordingly, motivated by the need to investigate the demand of tobacco in Albania, from which policies can be better tailored, and the scarcity of empirical studies, this paper is based on econometrical analysis of aggregate macro data with focus on demand price elasticity. The empirical analysis conducted on annually aggregate data for the time span 2006-2017 suggests that prices significantly affect tobacco consumption. More precisely, the estimated results suggest that tobacco demand is price inelastic, with demand being relatively more elastic in the long-run than in the short run. Namely, the price elasticity of tobacco ranges from -0.27 to -0.77 in long-run and from -0.007 to -0.107 in the short run. We recommend that the government should further engage in gradual increase of taxation, since empirical evidence confirms that this is an efficient strategy to reduce smoking.

Keywords: demand, elasticity, tobacco, fiscal policy, Albania

January 2019