The purpose of study is to analyze the impact of tax increases on cigarette smoking in South Korea, using monthly times series data of total domestic sales over the May 1997-September 2006. Myopic, rational addiction and difference equation models are employed reflecting the characteristics of time series data. The empirical results show that demand will adjust slowly to changes in price with the applications of the time series models of addiction to the demands for cigarettes. In addition, only the dramatic tax increase of 2005 was effective to reduce cigarette smoking, while the others seem to be irrelevant. This implies the increases in the prices of cigarettes significantly reduce cigarette smoking only when they are high enough to offset cigarette addiction effect. This study suggests several interesting policy relevant findings. First, it suggests that small increase of tax hardly reduces cigarette smoking because cigarette has addictive nature to offset the price impact. Second, it suggests that cumulative tax increases lead to cumulative significant smoking reduction. This implies that the long term reductions in cigarette smoking from a price increase will exceed the short term effects. This tends to support the implication of addictive behavior and the theory of rational addiction. Given the evidence of this study, the authors conclude that the impact of tax increases that result in sustained increases in the real prices of cigarettes will grow over time. Therefore the long run health benefits of higher cigarette taxes will be larger than the shorter benefits.

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