Does cigarette demand respond to price increases in Uganda? Price elasticity estimates using the Uganda National Panel Survey and Deaton's method.

Abstract

To provide the first published estimates of the price elasticity of demand for cigarettes in Uganda and thereby contribute to growing the evidence base of the likely impact of excise taxes on cigarette consumption and tax revenues in Sub-Saharan Africa. We use a linear approximation of the Almost Ideal Demand System along with expenditure data from the Uganda National Panel Survey and exploit the fact that prices of cigarettes vary across geographical space in Uganda. We find that cigarettes are price inelastic in Uganda with elasticity estimates ranging between -0.26 and -0.33. That is, we expect that cigarette demand will decline by between 2.6% and 3.3% every time cigarette prices rise by 10%. These elasticity estimates are in line with international evidence and are robust to outliers in the data. Our estimates of the price elasticity of demand for cigarettes suggest that the authorities in Uganda can reduce cigarette consumption and simultaneously increase tax revenues by increasing the excise taxes on cigarettes.