Objective: To estimate the price elasticity of the demand for cigarettes in Mexico based on data sources and a methodology different from the ones used in previous studies on the topic.
Material and methods: Quarterly time series of consumption, income and price for the time period 1994 to 2005 were used. A long-run demand model was estimated using Ordinary Least Squares (OLS) and the existence of a cointegration relationship was investigated. Also, a model using Dinamic Ordinary Least Squares (DOLS) was estimated to correct for potential endogeneity of independent variables and autocorrelation of the residuals.
Results: DOLS estimates showed that a 10% increase in cigarette prices could reduce consumption in 2.5% (p<0.05) and increase government revenue in 16.11%.
Conclusions: The results confirmed the effectiveness of taxes as an instrument for tobacco control in Mexico. An increase in taxes can be used to increase cigarette prices and therefore to reduce consumption and increase government revenue.