The effect of public policies and prices on youth smoking.

• Author: Ross, Hana

1. Introduction

   Government regulation of the market for tobacco products can be justified in a number of ways. Smoking is associated with market failures such as negative externalities and imperfect information among market participants, and these failures provide one rationale for government intervention. Another is the huge health care costs associated with the health consequences of smoking. The cost of medical treatment for smokers and second-hand

   smokers inflates health insurance premiums for everyone, regardless of smoking participation; in addition, many of these expenses are paid from public funds.

   Youth is of particular interest for public policy makers and economists who study smoking behavior. The evidence from recent economic studies indicates that adolescents are significantly more responsive than adults to changes in cigarette prices (U.S. Department of Health and Human Services [USDHHS] 1994). In addition, the vast majority of smokers complete their initiation prior to their 21st birthday (Gilpin et al. 1994). Therefore, focusing preventive efforts on youth seems to be the most effective way to achieve a long-term reduction in smoking prevalence. Public policy makers are also concerned with youth-specific smoking externalities. Almost all first use of cigarettes occurs during the high school years (Kessler 1995). At that age, consumers typically underestimate the health consequences of smoking and the risk of nicotine addiction (Kessler 1995; Johnston, O'Malley, and Bachman 2001), thus underestimating the price of smoking to them.

   The annual prevalence of cigarette smoking in the United States has been declining since the 1970s, stabilizing in the 1990s with approximately 62 million smokers in 1996, which represented 23.2% of the U.S. population (USDHHS 1996). Even though this figure is not high relative to smoking in other countries (the world average smoking prevalence in 1997 was 29%; World Health Organization, 1997), the declining trend in cigarette consumption has substantially slowed in the 1990s.

   It is particularly troubling that the slight decrease in smoking prevalence among adults in the 1990s was accompanied by an increase in smoking participation among youth and young adults. The evidence of this trend was detected in several nationally representative surveys. For example, the 1997 Youth Risk Behavior Survey (YRBS) reported an increase in average smoking prevalence among high school students from 27.5% in 1991 to 36.4% in 1997. According to the Centers for Disease Control and Prevention, the number of 12th grade high school students who started smoking as a daily habit jumped from 708,000 in 1988 to 1,200,000 in 1996, an increase of 73% (CDC 1995, 1996, 1997, 1998).

   However, statistics at the end of the 1990s suggest a respite from this trend in increased youth smoking prevalence. The YRBS reported a decline in smoking participation for 9th graders between 1997 and 1999 (by 17%), but very little change for 10th and 11th graders (decline by 2%), and a slight increase in smoking prevalence among 12th graders (by 8%). In 2000, the Monitoring the Future Surveys (MTFS) reported a decrease in smoking participation among all three surveyed high school ages (Johnston, O'Malley, and Bachman 2001).

   There is an economic explanation for this trend in smoking prevalence among youth. Even though the federal cigarette excise tax was raised twice in the beginning of the 1990s, real prices of cigarettes fell in the subsequent period. Between 1993 and 1996, the real price of a pack of cigarettes, adjusted for inflation, dropped by 10% (Tobacco Institute 1997). Real cigarette prices began to rise again toward the end of the 1990s. Between 1997 and 1999, the real price of a pack of cigarettes adjusted for inflation increased by 48% (Orzechowski and Walker 2000). This sudden change was partly triggered by a new financial liability of tobacco companies toward 46 states under the Master Settlement Agreement (November 1998) amounting to a $206 billion financial burden for the industry over the following 25 years. The increasing smoking prevalence among youth and young adults in the early 1990s and its decreasing trend toward the end of the decade suggest that this age group is highly sensitive to cigarette price incentives.

   Alarmed by the rising youth cigarette consumption in the early to mid-1990s, public officials designed and adopted numerous antismoking policies and state tobacco control programs. Cigarette market interventions now cover a wide range of areas. The most significant among them are tobacco excise taxes, smoke-free indoor air laws, laws restricting access of minors to tobacco (including retail tobacco licensing), advertising and promotion restrictions on tobacco products, requirements for warning labels on tobacco products, and requirements for product ingredient disclosure.

   Not all states were similarly aggressive as far as the taxing of tobacco and antismoking policies are concerned. Over time, the differences between state levels of taxation began to widen. The largest gap developed between tobacco producing and nonproducing states. As of November 1, 2002, state excise taxes ranged from 2.5 cents a pack in the state of Virginia to $1.51 a pack in Massachusetts. Tax differences on state and municipal levels create incentives for interstate smuggling. Certain states are also particularly known for their strong antismoking policies, the most outstanding being Arizona, California, and Massachusetts. This may result in smokers self-selecting to states with less stringent smoking restrictions, which may further complicate the evaluation of the real effect of these policies on smoking behavior.

   At the beginning of the 1990s, the federal government took the initiative in the area of enforcement and inspection. For example, in July 1992, Congress passed the Synar amendment requiring states to enact and enforce laws that prohibit tobacco sales to consumers under the age of 18. Under the regulations of this amendment, states must actively inspect and enforce the laws. They must demonstrate (by conducting annual, random, and unannounced compliance checks of retailers selling tobacco products) that the age limits access laws are being enforced. Otherwise, they are subject to reductions in their substance abuse block grant funds. However, in 2001 the General Accounting Office expressed some doubts with respect to the methods and accuracy of the enforcement data because states had an incentive to underestimate violation rates.

   The differences in cigarette prices, public policies, and their enforcement across states provide health economists with an opportunity to assess their effects on the demand for cigarettes. These findings are relevant not only for the formulation of health policy in the United States, but also in other countries, thus helping curb the global tobacco epidemic.

2. Previous Research

   The first economic studies addressing the issue of adult versus youth cigarette demand appeared in the 1980s. Lewit, Coate, and Grossman (1981) studied the smoking behavior of young respondents (12-17 years old) in the years 1966-70. Using a two-part model, they estimated an overall price elasticity of -1.44, which largely exceeded the previous estimates based on macro data studies. The authors hypothesized that young consumers might be more price responsive than adults because of lower disposable income. They also found that antismoking advertising had a negative effect on smoking participation, but it did not change the number of cigarettes consumed by smokers.

   Wasserman et al. (1991) studied adult and youth smoking behavior while controlling for state level antismoking regulations. Contrary to previous estimates, they found an insignificant effect of price on the amount smoked by young smokers. The authors attributed this result to a positive correlation between cigarette prices and state smoking policies. They argued that models that do not control for public policies produce upward-biased estimates, since they ignore this correlation (an omitted variable bias).

   Chaloupka and Grossman (1996) used the Monitoring the Future data on 110,717 high school students from 1992 to 1994 to study price elasticities, the effects of smoking restrictions, and the effects of rules limiting youth access to tobacco products. Their two-part model controlled for cigarette excise taxes and estimated price elasticities between -0.846 and -1.450, supporting the hypothesis about higher responsiveness of youth to cigarette price changes.

   Gruber (2000) estimated a state fixed effects model with a time trend employing survey data from two different sources: the Monitoring the Future Surveys (1991-1997) and the Youth Risk Behavior Surveys (1991-1997). He found that older teens (17-18 years old) are relatively more responsive to price (price elasticity of smoking prevalence -0.67) than younger teens (13-16 years old), whom he did not find price sensitive at all. However, the author did not address the issue of smoking uptake or social versus commercial sources of cigarettes for these different age groups.

   DeCicca, Kenkel, and Mathios (2001) used the 1988 National Education Longitudinal Surveys to estimate ordered probability models and discrete time hazard models of smoking onset. They found no significant effect of state taxes on the smoking onset among high school students. However, taxes were measured only in three different time points within a state, reducing their variation. The same model estimated without state fixed effects found a negative and significant effect of price on smoking initiation. The results of this study apply only to regular smokers, not to experimenters or occasional smokers. While estimates of price sensitivity vary from study to study, the current consensus among health economists is that youths are more price responsive than adults, with the overall price elasticity of youth cigarette...