The objective of this paper is to figure out the desirable way of cigarette
taxation by investigating the effect of discontinuous increase in cigarette tax on
smoking reduction. We use a monthly data for cigarette consumption to
estimate the cigarette demand function by employing explanatory variables
such as cigarette price, income and non-tax regulation. We consider the
possible difference in the price elasticities of cigarette consumption between the
periods of with and without sudden price shock in the estimation. We also
consider the short-term consumption adjustments before and after a sudden
increase in cigarette price through tax increase. It is shown that there is no
difference between the effect of a sudden tax increase and that of a gradual and
continuous tax increase on cigarette consumption. Especially, the price shock
of a sudden tax increase on cigarette consumption disappears in a short
period. The results imply that a gradual and continuous increase of the
cigarette tax at an appropriate rate is a good alternative for the cigarette pricing
policy to avoid various costs of sudden tax increase and to reduce smoking.