THE EFFECT OF EXCISE TAX ON CIGARETTE CONSUMPTION : IMPLICATIONS FOR THE HEALTHCARE EXPENDITURE IN SINGAPORE

Abstract

This thesis draws its motivation from the 1998 National Health Survey and Report that the government released in May 1999. Results from the survey show that although the smoking habits has fallen significantly among males across all age groups (18-64), the same trend is not observed for females. In fact, the overall level of smoking prevalence for females remains almost the same between the two periods (1992-1998). This is largely due to an increase in smoking prevalence among female aged 18-24, with an increase from 2.8% in 1992 to 5.9% in 1998. In this thesis, we derive the cigarette consumption demand function using the rational addiction model developed by Becker and Muprhy (1988), and evaluate the impact of using excise tax as a control policy on the level of healthcare expenditure in Singapore. Our results suggest that price is not a significant factor in determining cigarette consumption, with implications on the effectiveness of using excise tax as a regulatory instrument. However, using the Becker and Murphy formula for price elasticity, we derive the price elasticity of -0.63 for short run and -6.23 for the long run. Our findings indicate that the rise in smoking prevalence, which directly increases the proportion of smoking-related deaths, have a negative impact on the healthcare expenditure in Singapore. Using our estimates, a 1% increase in excise tax would increase healthcare expenditure by 0.06%. The results also support the theory of rational addiction that cigarettes are additive in nature. This implies that Singaporeans are rational in their smoking habits, incorporating the future effect of cigarette consumption in their current consumption decisions. Finally, it must be cautioned that these results must be interpreted carefully, since the social desirability of policies aimed at reducing smoking cannot be judged solely on the effects of reducing smoking on healthcare expenditure. The real benefits of reducing smoking are the increased life expectancy and the increased quality of life through better health.