Smoking intensity, compensatory behavior and tobacco tax policy

Smokers not only choose the number of cigarettes to smoke in any given period on the basis of price, they also choose the intensity with which to smoke - that is, how much nicotine to inhale. The possibility that quantity-reducing tax policies may be mitigated, or even completely offset, by higher intensity has been raised recently by Adda and Cornaglia (2006). The objective of this paper is to examine this possibility in the context of a utility-maximizing model of smoking that is based on known toxicological patterns. After calibrating this model to reflect observed behaviors, it is concluded that continuing smokers offset about one third of the quantity reducing impact of higher taxes. Compensatory behavior thus reduces tax effectiveness, but does not render it neutral. While toxicology has long recognized that nicotine inventory management is a key ingredient in smoking behaviour, this paper is the first to incorporate such knowledge into a utility-price based maximizing model.