ABSTRACT
This chapter focuses on the demand for tobacco products in general and that of cigarettes in particular. It discusses the price/tax policies for smoking reduction, and provides a flavor of the prominent modeling techniques. The chapter explores the fine distinction between tax and price elasticities and points out that this distinction can be important. It shows that there has been quite a bit of research on demand estimation and how price changes affect consumption. The elasticity of demand for tobacco products is a key input in determining the responsiveness of demand to price/tax changes and, therefore, in determining the effectiveness of price-based policies. The irrationality in addiction models stems from the fact that short-term and long run preferences of consumers are inconsistent. The traditional method of determining the price elasticity of demand is via specifying a demand function and estimating the coefficient on the quantity variable.
