Cigarette demand in Canada and the US–Canadian cigarette smuggling

Abstract

Using annual data from Canadian provinces, this paper studies the effects of a drastic reduction in Canadian cigarette taxes in 1994 on cross-border smuggling. The results show that the policy was successful in that the border prices seem to not have had a statistically significant impact on cigarette sales. The own price elasticity of cigarette demand in Canada is estimated to be around −0.7. The elasticity is slightly lower when the border-price effects are taken into account and is larger than the corresponding estimates for the USA, implying that dollar-for-dollar there might be greater opportunities for reducing smoking in Canada through higher taxes than the USA.

Acknowledgements

Helpful comments by Mike Nelson and research assistance of Eric Cochran are appreciated. The usual disclaimer applies.

Notes

 Given appropriate data, a finer distinction to account for the border-price effects might involve giving greater weight to counties at the border than counties in the interior (see Hunter and Nelson (1992)).

 The study also ran the regressions by deleting 1994 from the sample. The results were qualitatively similar and are available upon request.

 Gruber et al. (2003) have focused on a different aspect of smuggling, namely inter-province smuggling and found the price elasticity of cigarette demand in Canada to be in the −0.45 to −0.47 range. Elasticities have also been shown to be sensitive to whether taxed sales are used or untaxed sales are used (Galbraith and Kaiserman, 1997).