An optimal tobacco tax

The main objective of this work is to find the optimal specific tobacco tax that will at least cover the amount that the society (including the government) spends in correcting the externalities of the industry in question. Estimations say that such tax should be $22 MXN on each cigarette pack (leaving unchanged the current ad valorem rate of 160 percent). The eventual benefits of a given reduction in the number of smokers were also estimated. The cost-benefit analyses, to be found at the end of this report, indicate that taxes have a better ratio in reducing the number of smokers compared to any other hypothetical anti-smoking policy with a similar aim. This is mainly because an ex-smoker, even after 10 years of quitting, is still at a relatively high risk of getting ill, compared to a non-smoker. Moreover, the benefits of anti-smoking policies are heavily concentrated in the future, making them seem smaller by any discount rate. Therefore, providing disincentives is a better policy than trying to get smokers to quit.