According to [Prof Greg Mankiw], "economists ... have found that a 10% increase in the price [of cigarettes] causes a 4% reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: a 10% increase in the price causes a 12% drop in teenage smoking."
In practice, however, the link between price and smoking seems a little less direct and a lot more uncertain. Real cigarette prices in Canada (using Ontario as a measure) have rolled up and down by as much as 80% over the last 20 years, with impacts on smoking prevalence that are far from clear. The link between price and
smoking is certainly far from the mechanical one implied by Prof. Mankiw...
We appear to be witnessing a decline in smoking, including among teenagers, but the movement in smoking rates seems strangely disconnected from price. Teen smoking declined between 1993 and 2001, for example, at a time when prices first fell and then remained flat. We also know that smoking is now subject to the greatest onslaught of regulation short of an outright ban. What role has price really played?
Could it be, in the case of gasoline taxes, that people have a much better idea of the economics of prices and demand than economists? Using price to change behaviour and shift demand forces all individuals to make major compromising decisions. Large numbers would have to continue to consume gasoline at high prices, forcing them to curb their consumption of something else. That's the result planners want, but it is not obvious to consumers that it will work or that it is fair. Look what happened to tobacco.
Dependence on anything, whether it’s cigarettes or gasoline, cannot be cut overnight, but (to return to the theory on gas taxes), increased costs of gasoline should prompt industries to invest and switch to lower-cost fuel options.