Abstract
We use household survey data to estimate the price elasticity of quantity, and of quality, for tobacco products. In our data, commonly used estimation methods suggest an own‐price elasticity of demand of about −1. These methods add together responses on the quantity margin and the quality margin. Just one third of the response to price is from quantity and two thirds is from quality. The simulated effect of higher excise taxes is to reduce overall quantity by just one third of what is predicted if the quality response is ignored. Higher taxes also shift demand to lower quality tobacco products.
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