The Interdependence of the Cigarette and Liquor Demand by 772qom

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									 The Interdependence of the
Cigarette and Liquor Demand
         Maury P. Zapata
        Econ 510, Fall 2006
    Professor Dr. Castillo-Ponce
                 Thesis
• If cigarettes and liquor are complements,
  then public policy needs to check the
  consumption of only one to check the
  consumption of the other.
                Objective
• Are cigarettes and liquor complements
  (negative cross elasticity of demand) or
  are they substitute goods (positive cross
  elasticity of demand)
• Should states consider changing tax rates
  on cigarettes and liquor as a joint decision
  to maximize tax revenue.
               The Data
• A pooled time series cross-section data
  set on the US cigarette and liquor
  consumption spanning nearly three
  decades
• Cigarettes and liquor have been frequent
  targets of taxes because they exhibit
  highly inelastic demand and are
  considered “sins” because of the their
  harmful health affects and negative
  externalities
• More than 100 state liquor tax increase by
  federal, state, and local governments have
  been passed in the 1980’s
        Current Applications
• November 7, 2006 California voters
  rejected Prop 86 that would have levied a
  per pack surcharge of $2.60 by a NO vote
  of 52.2% vs. Yes vote of 47.8% in order to
  fund child care
• In 1998, California voters approved of
  Prop 10 that increased a per pack
  surcharge of $.87 for child care
              Methodology
• CONSc =f(PC, PL, AC, Y, HC,RC)
• CONSL=g(PL, PC, AL,Y, HL, RC)
ConsC=per capita consumption of cigarettes
PC=price of cigarettes
PL=price of liquor
A=advertisement expenditures
Y=real per capita disposable income
H=habit-persistence effect (lagged consumption)
R=regulatory changes (Control, Fairness,
  &Broadcast)
        Regression for Liquor
• ConsL=-3.400-.130PL+.924Y+.332PC
         (18.95)* (3.22) (15.28) (3.84)
        -.007AL-.030AL-1+.108CONSL-1
         (0.41) (2.32)     (3.32)
R2=0.95, adj. R2=.95, N=779,
  F(43,736)=330.29*

*t-statistic with 5% level
    Regression for Cigarettes
• CONSC=3.443-0.369PC+.312Y+0.100PL
             (22.19)* (4.79) (6.65) (3.18)
         -0.061AC+0.068AC-1+0.101CONSC-1
           (2.02) (2.29)       (2.73)
R2=0.91, Adj.=0.91, N=779, F(45,
   734)=170.08
*t-statistic with a 5% level
 Effectiveness of Policy Measures
             for Liquor
• CONSL=-3.630-.150PL+0.880Y+0.360PC
             (19.94)* (3.75) (14.65) (4.22)
       -0.186AL+0.155AL-1+0.121CONSL-1
           (4.83) (4.05)       (3.77)
       +0.486CONTROL
            (5.12)
 *t-statistic with 5% level
 Effectiveness of Policy Measures
           for Cigarette
• CONSC=4.462-0.279PC+ 0.363Y
         (16.69)* (3.66)      (7.5)
     +0.187PL-0.025AC+0.108AC-1
        (5.27)    (0.82)      (3.66)
    +0.083CONSC-1+0.005FAIRNESS
        (2.28)           (4.38)
    -0.042BROADCAST
        (3.08)       *t-statistic with 5% level
          Fin
• Salud

								
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