Introduction
The
significance of smoking as a contributor to preventable illness
and premature death is now widely accepted and proactively
addressed by governments globally.
Annually,
according to the Department of Health, smoking alone causes around 79,000
deaths in England, with a predicted cost to the National Health Service (NHS)
of £2.5 Billion in 2015.
Over the past decade,
a broad range of government and health group interventions have
been implemented and evaluated. These have been especially targeted
at young people due to the perpetuation of smoking into adult life,
which arises the issues of the long-term effects associated with health
loss and medical costs.
There is a broad range of
literature surrounding this topic which explores many different aspects of the
specifics that affect smoking behaviour and the most effective elements in
reducing demand.
The primary purpose of
this paper is to observe the effect of cigarette taxation on cigarette
consumption within the United Kingdom (UK). Many of the studies within the
literature have taken place in Asia or the United States of America; there have
only been a small number of relevant papers that use up-to-date data within the
UK. There is, therefore, a need for further analysis to evaluate the
differences specifically within the UK market. This paper will evaluate the
significance of increasing taxation on cigarette consumption and whether these
results coincide with findings from other countries. A logical explanation of
any differences that may exist will also be presented. The model was estimated
using an OLS estimate to regress the cigarette consumption in the UK against
multiple explanatory variables.
The results from the OLS
regression show that as cigarette prices increase by 10%, the level of annual
cigarette consumption per person decreases by 21.4%. This estimate supports the
ideas of economic demand and supply theory, which is reflected in the other
empirical evidence. Alongside this, other literature pieces reviewed in the
research show that as price increases, demand decreases. The size of the
estimate can be attributed to several economic theories; it is therefore
directionally correct and consistent with the other literature pieces reviewed.
The main limitation of
the empirical model is the possibility of heteroscedasticity, autocorrelation,
and multicollinearity. However, it is commonly accepted that such problems
arise in time-series data, and therefore several tests will be used to
eliminate them as practicably as possible. The tests used to deal with these
problems are the White Test, robust standard errors, Breusch-Watson test, and
multicollinearity procedures.
The remainder of the
paper will be organized as follows: Section 2 will discuss the other literature
pieces; Section 3 describes the data sources and includes a thorough
description of the variables and their relation to the model; Sections 4 and 5
provide an outline of the empirical model and evaluate the results; Section 6
discusses the limitations surrounding the project and what areas could be
improved; and lastly, Section 7 summarises the key findings and
recommendations.