DEMAND FOR TOBACCO (CIGARETTE), AND THE EFFECT OF CUSTOMS RAISING UPON IT IN SAUDI ARABIA

Abstract

This study has estimated the demand for cigarette in Saudi Arabia by using two independent variables, namely, real retail price of cigarette and real per capita income. Three econometric models were used to estimate the demand functions and compare their results to choose the best model. These models were: Linear, Logarithmic, and Semi-Logarithmic. Using time-series data (1980-1994), the regression results indicated that all models explained over 90 percent of the variation in the quantity of consumed cigarette in Saudi Arabia. The Semi-Logarithmic model outperformed the other models on economic and statistical grounds. The estimated price and income elasticities of cigarette were (-1.40) and (0.25), respectively in the semi-logarithmic model. This means that an imposition of an importation tax of 50 percent of the value of imports will lead to a decrease in cigarette consumption in the year 2000 by one third of the consumption without taxes. Finally, the study shows that the demand for cigarette to be price elastic and this policy makers to put the import policies for tobacco in future