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Public Sector Economics Over-Shifting in the Cigarette Industry.

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Presentation on theme: "Public Sector Economics Over-Shifting in the Cigarette Industry."— Presentation transcript:

1 Public Sector Economics Over-Shifting in the Cigarette Industry

2 Federal and State Excise Taxes constant nominal (i.e., no inflation adjustment) amount per pack –occasional state exceptions. eg., Hawaii charged fraction of wholesale price federal tax owed by manufacturer and state tax owed by wholesaler wholesale prices include federal but not state tax 1983: first federal hike since 1950s (8 to 16 cents) other federal hikes in 1991, 1993, 2002, 2009; now 101 cents wide variation across states, now from 17 (MO) to 435 (NY) national average state rates have more than tripled since Dec , from 39 cents to 132 cents

3 Tobacco Master Settlement Agreement 46 states agree with major manufacturers to waive lawsuits in exchange for $4+ billion payments from the industry each manufacturers share of the payment depends on his market share MSA payments impose a marginal cost on producers, beginning in 1999 marginal cost varies from year to year, from 29 cents (1999) to 40 cents (2002)

4 Cross-Section vs Time Series cross-section studies show shifting of 1 or 1.1 law of one wholesale price –trans-shipping may limit cross-section variation in wholesale prices even for a monopolist who significantly over-shifts wholesalers have more incentive to ship than consumers –until last year, major manufacturers had only one (national) wholesale list price. even now, just a few regions –1.1 may only represent over-shifting in wholesale and retail cigarette markets time series suggests at least 1.3? –April 2009 fed tax increases 62 cents –Over prior year, state taxes increased 12 cents –Cigarette prices increased 97 cents (97-4)/74 = 1.3


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