Cigarette smuggling mitigates the public health benefits of cigarette taxes

Abstract

Merriman (2002) argues that cigarette smuggling does not reduce the health benefits of cigarette taxation, because, in addition to the purchase price of smuggled cigarettes, those purchasing smuggled cigarettes have to pay a higher inconvenience price for their cigarettes, so that smuggled cigarettes no more than replace legal cigarettes. Here, it is argued that Merriman is incorrect, that while smuggled cigarettes have the same full cost as legal cigarettes at the margin, they have a lower inframarginal full price, which has the effect of increasing smoking behaviour.

Notes

¹ The European Union recently charged Phillips Morris International with supplying smugglers cigarettes to be sold in EU nations. Phillips Morris and EU settled for US$1.25 billion (Watson, 2004). See also Gruber et al. (2003) about a lawsuit by the Canadian government against R.J. Reynolds Tobacco Holdings, Inc.

² Most online search engine list a number of cases almost every year. See, for instance, Zaman Gazette (2003).