Vice Squad
Sunday, June 06, 2004
South Koreans Confound Empirical Economists

It's useful to know how much cigarette consumption will decline in response to a tax-induced price rise. The obvious way to generate this information is to examine previous tax changes, and in particular, to look at the extent of cigarette sales in advance of and following past tax increases. But this straightforward approach is hindered a bit by the fact that cigarettes are storable. Smokers who anticipate a tax increase might stock up before the higher prices come about, so it will look like the decline in consumption caused by the tax increase is greater than it actually is. (Another complicating factor is increased purchases from neighboring jurisdictions when the tax increases.) The South Korean government is reportedly thinking about raising cigarette prices -- sure enough, current sales are booming. Why don't people behave in ways that would make the lives of social scientists easier? [Why not just assume that they do? -- ed.]

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