What is the effect of cigarette taxes (and smuggling) on the consumption of alcohol? What does that imply about the cross elasticity of demand between the two? (d) Is binge drinking among college students sensitive to the price of alcohol? A) Mental illness could affect the level of consumption of addictive goods and could affect the price elasticity of addictive goods. The results show that individuals with a history of mental illness are 25 percent more likely to consume alcohol, 69 percent more likely to consume cocaine and 94 percent more likely to ensure cigarettes.
Individuals with a history of mental illness are reactive to price although the price elasticity differ somewhat from those without mental illness. These results provide an added justification for higher taxes and other supply reduction activities since they show that these policies are effective with this high participation group. B) Long-term research from the US and Europe shows overall alcohol consumption doesn’t rise much during recessions and can even decline. In the US, for example, a 1 percent increase in state unemployment corresponded to a percent reduction in alcohol consumption.
The decrease was even larger when unemployment went up nationally. Recessions don’t make people stop drinking alcohol altogether. Instead, they change how much and what kinds of alcohol they drink. In tougher times, people are less likely to eat and drink out and are more likely to stay at home. In Addition there’s a shift from expensive to cheaper types of alcohol. C) The demand elasticity are much higher for the lowest income or consumption groups than for the higher groups.
They suggest, that taxes on cigarettes may not be very regressive, as more price sensitive lower income groups derive a greater self-control benefit from higher cigarette prices. Higher taxes on cigarettes do not appear to drive consumers into drinking as an alternative. Depending on the data set, we either find limited evidence that cigarettes and alcohol are complements, or no strong evidence either way. Smuggling may have served to raise cigarette consumption and also led to higher consumption of alcohol as well.