Demand for alcohol and cigarettes in Brazil: elasticities, microsimulation and welfare change

Abstract

This paper analyzes the demand of Brazilian families for alcoholic beverages and cigarettes, with emphasis on elasticities (price, restricted expenditure and income) and simulations of changes in the prices of these items on the welfare. We use the Quadratic Almost Ideal Demand System adjusted for censored consumption and expenditure endogeneity together with data from the Household Budget Survey 2008-2009 and the Smoking Supplement of the National Research by Household Sample 2008. The main results show that cigarettes and alcohol have positive expenditure and income elasticities of demand and substitution relationship in terms of cross-price, regardless of per capita income level and region of residence. Positive price changes in these items have low adjustment of demand, as well as the rate of monetary compensation required due to changes in cigarette or alcohol have different trends to the level of family income and residence areas. The measure of compensating variation shows that families with higher income levels are more resistant to reduce the consumption of beverages, while for the cigarette the level of resistance is higher for the poorest families.