25 Jun 2013
AD VALOREM TAX. A tax that is a percentage mark-up on price (e.g. 30%, added to the retail price pre-tax). Countries impose ad valorem taxes on manufacturers’ price, on wholesale price, on recommended retail price, or on actual retail price.
AFFORDABILITY. The cost of a good or service relative to the price of other goods and services and relative to income. There are many ways of calculating affordability. Blecher and van Walbeek suggest calculating the percentage of per capita GDP required to purchase 100 packs of cigarettes (or x quantity of another tobacco product).1
INCOME ELASTICITY. A measure of the responsiveness of demand for a product or service to changes in incomes, all other things being equal. As countries get richer and the average citizen increases their real income, they purchase more goods and services (including more tobacco products). For example, if the income elasticity of demand for luxury cars is 3.5, that means that a 1% increase in real incomes will lead to a 3.5% increase in sales of such cars. However, income elasticities vary from product to product, by socio-economic class, by age etc. Demand for some products may actually fall as incomes rise, if a higher-priced but more desirable substitute is available. (For example, demand for launderettes might fall as incomes rise if more people purchase their own washing machines.) Although there are fewer studies on income elasticity of demand for cigarettes than there are for price elasticity, it is clear that in low- and middle-income countries, higher incomes lead to higher demand.2
NOMINAL PRICE. The price of a good or service, without any adjustment for inflation. (For example, in 2012, a pack of cigarettes cost $15.) Nominal price increases can look very impressive, particularly over longer periods, which is why the tobacco industry often uses them to lobby against further tax increases. However, if consumer prices have risen on average by 50%, and tobacco products have gone up by only 30% over the same period, they are now cheaper relative to other goods and services. In other words, the nominal price has increased, but the real price has decreased.
PRICE ELASTICITY OF DEMAND (price elasticity). A measure of the responsiveness of demand for a particular product or service to changes in price, all other things being equal. For example, if the price elasticity of demand for cinema tickets is -0.8, that means that a 1% increase in real price will lead to a 0.8% decrease in sales. Conversely, a 1% decrease in price should lead to a 0.8% increase in sales. In the case of tobacco products, the price elasticity of demand is generally quite low, roughly -0.4 in high-income countries, meaning that a 1% increase in price leads to a 0.4% decrease in per capita consumption. Price elasticities can also be calculated for subsections of the population, such as youth (who are more price-sensitive), higher-income citizens (who are less price-sensitive) and so on.
REAL PRICE. The price of a good or service, adjusted to eliminate the effect of inflation. Typically, real prices are expressed in terms of current units from a reference year. (For example: in 2012, a pack of cigarettes cost $10 in 2000 dollars.) Real prices allow for valid comparisons over time – if the real price of tobacco products increase over time, they are becoming more expensive relative to other goods and services in a given country. Significant real price increases are needed to reduce tobacco consumption.
SPECIFIC TAX. A tax that is a set amount per quantity of product, such as $10 per 1,000 cigarettes. In the case of cigarettes, this may be a tax per stick, per pack or sometimes per gram. (Weight-based taxes are generally not recommended, as they can be manipulated by manufacturers.)
2. Guindon et al. review estimated income elasticities in several Southeast Asian countries. Guindon GE, Perucic, AM, Boisclair, D. Higher tobacco prices and taxes in South-East Asia. An effective tool to reduce tobacco use, save lives and generate revenue. HNP Discussion Paper. Economics of Tobacco Control Paper No. 11. World Bank and WHO, October 2003. Available on-line.