Estimating price elasticity for tobacco in Canada’s Aboriginal communities∗

Exploiting a repeated cross-section created from the 1991 and 2001 waves of the Aboriginal Peoples Survey, I provide the first estimates of tobacco price elasticity for adults in Canada’s Aboriginal communities. These communities are small and secluded, presenting a unique opportunity to look at the potential influence of community smoking norms on individual behavior. Specifically, I allow aggregate smoking behavior within the community to influence individual smoking behavior. I distinguish between two price effects: the direct effect, reflecting individual reaction to a price change; and the indirect effect, whereby price influences the individual by changing community smoking behavior. I find the indirect effect doubles the price elasticity over the direct effect alone. I also find the discouraging effect of taxes on smoking to be significantly less than previously hypothesized. A 10 percent increase in prices leads to a 0.73 percentage point decrease in daily smoking, a 1.39 percentage point decrease in occasional smoking, and does not significantly affect smoking intensity among daily smokers. I conclude that taxation is an effective tool for revenue creation but a largely ineffective tool for adult health policy.