Before heading home, one of the students – Damir – catches up with his friends to chat about the day’s events, and to smoke a cigarette. At the kiosk he asks for his favorite brand, but to his surprise, he learns that – yet again – cigarette prices have gone up. This worries Damir – soon he won’t be able to afford as many cigarettes as before. Why do cigarette prices keep increasing, he wonders?
The short answer: to discourage young people like Damir from beginning to smoke or continuing to smoke.
In Bosnia and Herzegovina, more than 8,700 people die every year due to tobacco-related illnesses – that’s roughly twice the number of workers in Elektroprivreda BiH! In addition, the financial costs associated with treating patients with tobacco-related diseases (from smoking or exposure to secondhand smoke) are a significant burden on the economy. According to some estimates, between 80 - 100 million KM in public resources are spent every year in treating tobacco victims – this is equivalent to one-third of the total spending on all levels of education in Sarajevo Canton!
The benefits of deterring people from starting or continuing to smoke are obvious. People could live longer, healthier lives. And, scarce financial resources could be redirected to the provision of essential public services.
Hence, the increases in tobacco prices seem like a clever idea.
But what if the price increases impact some people more than others, particularly those with less financial resources?
The majority of the population – especially those with less resources – will ultimately benefit from these increases. A recent World Bank study estimates that more than 60% of the population in Bosnia and Herzegovina will end up better off after increases in cigarette prices.
How is this possible, you may ask?
To arrive at this conclusion, in this study we calculated the impact of an increase in tobacco prices on Bosnian household budgets, following a methodology recently applied in a number of other countries around the world (including Ukraine, Russia and Moldova). Based on data from the 2015 Household Budget Survey, the study simulates the impact of an increase of 25% in cigarette prices, an increase similar to the one registered in the average 20-pack of cigarettes between 2015 and 2018, according to the Indirect Taxation Authority.
The study finds that, when faced with increases in tobacco prices, households with the least financial resources reduce consumption considerably more than those with more resources. For an increase of 10% in prices, people with the lowest income curtail consumption by up to 10%, while those with highest income reduce consumption by only 3%. Because of this sensitivity to prices, households at the lower end of income distribution reduce tobacco consumption to the point where they may even end up spending less money on cigarettes than before the increase.
More importantly, when considering two additional effects derived from the decrease in tobacco consumption, households would see their welfare eventually increase. For example, households could save resources with a reduction in health expenses from a lower incidence of tobacco-related illnesses. And, additional income brought about by an increase in life expectancy means that the bottom 60% of the income distribution in the country could end up with more resources than before the price increase.
This is certainly good news. Tobacco excise taxes discourage consumption, while price spikes do not negatively impact the less well-off.
As Damir can likely testify, higher cigarette prices lead to a reduction in cigarette consumption, and even push people to the point of giving up cigarettes (especially those on a tight student budget!) This not only means lower medical expenses for Damir further down the road – but also a longer, healthier, more productive lifestyle.
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