Nova workboard

a blog from young economists at Nova SBE

How to stop people from smoking?

According to a new policy of the European Union that came into force on 19 May 2014 there will be new rules for cigarettes packaging. Explicit health warning pictures will need to be shown both on the front and the back of all packages. Implementing the changes needs to be done within two years.

The European Commission believes the new rules will be extremely helpful in order to lower the number of young people addicted to tobacco and eventually lead to a drop of 2% in the tobacco consumed in a period of about five years. Is this really likely to happen? There are no evidences to confirm it. One example is the Australian government that on 1 December 2012 introduced a similar policy, banning branded cigarettes packages and introducing health-warning pictures. If this has had a positive effect in terms of decreasing the number of people (especially young) that started to smoke we still do not know. Research, commissioned by the Cancer Society of Victoria, has showed that during the implementation of this new Australian policy 80% of the people were more likely to think about quitting and 70% thought that cigarettes were less satisfying.

Along with this policy comes a new EU-wide tracking of cigarettes to combat illegal trade in order to facilitate the traceability of the products and decrease contraband cigarettes.

The question on how Europe will react to this policy is still very difficult to answer. It is likely that thanks to a better-structured control of cigarettes smuggling the European governments will reinforce their roles in terms of capacity of dealing with this issue.

Can governments help this process also through higher taxation? According to a paper that analyzed how the cigarettes demand in Italy responds to higher or lower prices (elasticity), in the period 2004–2010 the Italian demand decreased as a consequence of the constantly increasing prices of cigarettes. Italian consumers appeared to be very sensible to the price factor. This very high sensibility led to a decrease in the tax revenue. In 2013 the tax revenue was reduced by 5%. This means that in Italy higher cigarettes taxation leads to smaller cigarettes consumption but at the same time smaller amount of tax revenue for the government. For this reason Italy has recently introduced a new method to estimate the tax revenue. Taxes will no longer be calculated on the market price, which in the past years led to a “downward price war”, but on the weighted average.

This example shows a possibility of how not only EU, but also governments can act on smoking. A significant increase in prices may lead to a rapidly decreasing demand. Thus, taxation, while possibly decreasing the amount of smokers, might fail due to decreasing revenues.

EU cannot fight the health issue alone. Governments need to act too and higher taxation might be useful if implemented in the right way.

Giulia Casagrande

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Author: studentnovasbe

Master student in Nova Sbe

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