AN EMPIRICAL-ANALYSIS OF CIGARETTE ADDICTION

To test a model of rational addiction, we examine whether lower past and future prices for cigarettes raise current cigarette consumption. The empirical results tend to support the implication of addictive behavior that cross price effects are negative and that long-run responses exceed short-run responses. Since the long-run price elasticity of demand is almost twice as large as the short-run price elasticity, the long-run increase in tax revenue from an increase in the federal excise tax on cigarettes is considerably smaller than the short-run increase.