A. Blake Brown

Cigarette Taxes and Smoking Restrictions: Impacts and Policy Implications

The effects of recently proposed increases in cigarette excise taxes and smoking restrictions on tobacco prices and quantities, quota lease rates, and revenues to tobacco-producing areas are analyzed. The price elasticity of demand for U.S. cigarette exports is estimated. Proportionally similar increases in smoking restrictions or cigarette taxes are shown to have effects of similar magnitude on cigarette consumption. A policy of reducing price instead of the quantity produced is found to minimize the impact of increased taxes and smoking restrictions on revenues to tobacco-producing areas.

The Changing Political Environment for Tobacco—Implications for Southern Tobacco Farmers, Rural Economies, Taxpayers, and Consumers

The farm level economic implications of the political turmoil surrounding tobacco are examined. Tobacco ranks first in crop receipts in the Southeastern United States. Free market advocates typically want to eliminate the tobacco program because of its cartel-like nature. Health advocates want to maintain the program because it limits tobacco production. Cigarette manufacturers tolerate the program because of the political support they receive from program stakeholders. The effects of cigarette price increases with and without a program are examined. Whether or not the program is maintained in the face of declining tobacco demand has significant implications for Southern agriculture.

PRICE VERSUS QUOTA REDUCTIONS: U.S. FLUE-CURED TOBACCO POLICY

Declining domestic cigarette consumption, increased global competition, and loss of import restrictions indicate decreased demand for U.S. flue-cured tobacco. The effects of 10% declines in domestic and export demand are evaluated under a policy of reducing quota to maintain price versus a policy of allowing price to fall to maintain quota. Changes in prices, quantities, revenues, and economic rents are simulated. Losses to nonfarming quota owners are minimized under a policy of price maintenance, while losses in revenues to tobacco-producing areas are minimized by a policy of quota maintenance. Aggregate losses to tobacco growers are greater under a policy of quota maintenance.

Adjustment costs and dynamic factor demands for U.S. cigarette manufacturing

Following the approach of Berndt, Fuss, and Waverman, a dynamic model for U.S. cigarette manufacturing is developed and factor demands estimated. Tobacco and capital stocks are treated as quasi-fixed inputs. The results indicate that there are significant adjustment costs associated with adjusting tobacco stocks, but not with adjusting the capital stock. Short-run, intermediate-run, and long-run output constant elasticities are estimated for inputs in cigarette production. Demand for U.S. tobacco by U.S. cigarette manufacturers is found be more inelastic than shown by previous studies using static models. Cigarettes produced for export appear to differ in their marginal cost of production from cigarettes produced for the sale in the U.S. market.

Pass-Through of Exchange Rates and Tariffs in Greek-US Tobacco Trade

The paper examines the extent to which exchange rate and unit tariff changes are passed-through in US import prices of unmanufactured Greek oriental tobacco. The results indicate partial pass-through of exchange rates and tariffs. Exchange rate pass-through is about 0.272 and tariff pass-through about 0.185. One possible reason for the partial pass-through is oligopoly in tobacco exporting. Oligopoly would imply that depreciation of the drachma relative to the US dollar benefits tobacco exporters operating in Greece. A second possible reason is a possible correlation between exchange rates premiums paid to tobacco exporters in previous agricultural policies. An important implication of this possible correlation is that Greek tobacco prices may be more sensitive to exchange rate changes under the current agricultural policy.

Dynamic Factor Demands for US Cigarette Manufacturing Under Rational Expectations

The rational expectations approach to adjustment cost models for factor demand is used to develop a dynamic model for US cigarette manufacturing. In the present study dynamic production modelling is extended to the case of multiple outputs. This analysis is the first to address cigarette manufacturing allowing for the possible influence of quasi-fixed factors, multiple outputs and rational expectations. Short-, intermediate-, and long-run factor demands are estimated and the presence of adjustment costs tested for in US cigarette manufacturing. The results indicate that there are significant adjustment costs associated with adjusting tobacco stock but not with adjusting the capital stock. Cigarettes produced for exports appear to differ in their marginal cost of production from cigarettes produced for sale in the US market.