Does Cigarette Taxes Have the Desired Effect of Reducing the Demand for Cigarettes?

5.7 Does Cigarette Taxes Have The Desired Effect Of Reducing The Demand For Cigarettes?

Joey Cambron & Joel Doan

Indiana Wesleyan University

BBAO103

ECO-330-A Applied Microeconomics - Business

Wednesday, August 13, 2014

James Holland

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Does Cigarette Taxes Have The Desired Effect Of Reducing The Demand For Cigarettes?

Introduction

Tobacco companies in the United States of America and around the world use pricing as one of the most important marketing strategies. In the United States, rapid growth of American Tobacco Company was attributed to the aggressive pricing strategies employed by James Duke. James Duke was the first cigarette producer to move from traditional hand rolling of cigarettes to mass cigarette production with the help of Bonsack cigarette machine invented in 1880 (Chaloupka et al., 2002). He enjoyed cost advantages as he was able to cut prices for his brands and still earn significant profits. These low prices led to a large increase in cigarette consumption form 1.5% in 1870 to almost 40% in 1890. This cigarette consumption trend remained constant for more than 30 years. In 1950s, the first scientific studies released health risks from smoking. This, together with the Surgeon’s General report released in 1964 changed the landscape of cigarette consumption. Several states, including the United States of America, began to increase excise taxes on cigarettes in an effort to reduce the...