Why Cigarette Taxes Work and Pizza Coupons Don't
Raise the price of insulin and people still buy it. Raise the price of pizza and they walk down the street.
Economists call it elasticity, and it answers one question: when the price moves, how much does the quantity sold move with it? The number is a ratio. If a 10% price hike cuts sales by 20%, demand has an elasticity of 2. If sales barely budge, the number sits near zero.
The split is not academic. Cigarette taxes raise billions every year precisely because smokers, in the short run, do not quit when prices rise. Studies of U.S. smokers put the elasticity around 0.4 — a 10% tax loses only 4% of the cartons. The state pockets the rest.
Luxuries flip the script. Restaurant meals, vacation flights, brand-name cereal — all have elasticities well above 1, which is why grocery aisles run constant promotions and airlines change fares hourly. A small price cut can pull a lot of buyers off the fence.
Four things make demand stretchy: substitutes (Pepsi for Coke), share of income (a yacht is a bigger decision than gum), how necessary the thing is, and how much time the buyer has to react. Gasoline is famously sticky over a month and famously elastic over a decade — long enough for someone to buy a smaller car.
The number changes everything downstream. A monopolist sets prices where the curve bends just so. A government taxes the inelastic and subsidizes the elastic. A startup founder learns it the hard way the first time a 5% bump empties the cart.
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