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.

Literature Review