Umeň Economic Studies, Department of Economics, Umeň University
Rational Addiction and Smoking when there are Legal and Illegal Cigarettes
() and Maria Melkersson
Abstract: We propose an extension of the often used rational
addiction model. Our model includes both legal and illegal cigarettes. The
model is tested on a Swedish data set covering the aggregate legal and
illegal cigarette markets. When we treat legal and illegal cigarettes as
independent demand equations, we find no addiction, but rationality for
legal cigarettes, and rational addiction for illegal cigarettes. Since the
demand for legal and illegal cigarettes is probably best considered as
simultaneously determined, we have also estimated a "semi-reduced" system.
Legal cigarettes are negatively related to their price while illegal
cigarettes are positively related to the legal price. This indicates that,
as expected, the drawback of excise duty on legal cigarettes is that more
agents are attracted into the illegal cigarette market. When testing the
hypothesis of a common habit stock for legal and illegal cigarettes, the
results are mixed. It cannot be ruled out that legal and illegal cigarettes
accumulate two separate habit stocks. The proposed model is applicable to
any situation with two a addictive consumption goods.
Keywords: Bootlegging; Demand Habits; Rational Addiction; Taxation; (follow links to similar papers)
JEL-Codes: D11; D12; (follow links to similar papers)
31 pages, November 28, 2000
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