Economic Perspective: The Staying Power of Tobacco

NC State College of Agriculture and Life Sciences professor Dr. Mike Walden working in a recording studio.

MARY WALDEN:

“Today’s program looks at the staying power of tobacco. Mike, as anyone who is aware of North Carolina’s history knows, tobacco was a dominant industry in the state throughout much of the 20th century. But changes in consumer preferences and restrictions on smoking availability have combined to reduce tobacco use in recent decades. Does this mean the tobacco industry has become unprofitable?”

MIKE WALDEN:

“Amazingly tobacco companies have continued to be profitable. In fact, tobacco profits have doubled in the past decade, and this is even though cigarette consumption in the U.S. is down by one-third over the last ten years. It’s also down in most of the world. So how can this be?”

“How can profits be up when consumption is done? Well, prices have risen. In fact, prices have almost doubled for cigarettes since 2008, and although the tax on cigarettes have also gone up, the percentage of the retail price that the tobacco companies get has remained the same.”

“And so what this means is that there’s an economic lesson that says, ‘When the prices goes up, consumption goes down.’ But they don’t have to change in the same pattern. What’s happening with tobacco and with cigarettes is prices have gone up, those people who are still avid consumers of cigarettes, maybe they’ve reduced their consumption by a few packs a week, but it’s still high enough to maintain and in fact cause those profits to go up.”

“Bottom here is that even though the cigarette industry has taken a battery in terms of consumption, publicity et cetera, it’s still actually doing rather well in terms of profits.”

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