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The demand for cigarettes has shrunk over several years mostly due to regulation, taxation, and health campaigns.


These have all lowered consumption of cigarettes and pushed consumers into purchasing substitutes. Electronic cigarettes (e-cigs) are one such substitute. The addictive nature of cigarettes (nicotine) was once a reason why even though price increased and income stayed the same people continued to purchase cigarettes. Now, as a direct result of improved technology, e-cigs can deliver the nicotine with fewer health problems. E-cigs do not give off smoke/smell which reduces some of the cost of being a cigarette smoker. The water vapor is not harmful to those around, so in areas of the United States banning smoking inside, e-cigs could circumvent this cost to smokers. We have all seen those poor people sitting outside a restaurant with a cigarette in the rain.

E-cigs currently are less regulated and cost less than regular cigarettes, but this may change. As countries see consumers substituting to e-cigs they may begin to regulate e-cigs the same way as cigarettes. Currently e-cigs are not perfect substitutes for cigarettes. If cigarettes and e-cigs were perfect substitutes, when prices rose on cigarettes consumers would switch over to e-cigs. The price of e-cigs should then rise to the same amount that cigarettes were at before. This will not happen to e-cigs due to the fact that there is not the “sin” tax added on top of e-cigs that normal cigarettes have. Therefore the price of e-cigs will not equal the price of cigarettes unless a similar tax is imposed. E-cigs are substitutes for cigarettes but not perfect substitutes, which in this case could encourage cigarette smokers to switch to e-cigs.

Perfect Subs
Market for 2 perfect substitutes and how prices change to equal out when a product such as E-cigs begin to be sold in stores. (Note: E-cigs are not actually perfect substitutes but put pretend they are.)

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  1. It’s good to graph, but the essence of your stories here are tied to elasticities, so you don’t communicate if you stick to 45º lines.

    See the previous post. You are second off the mark, so by rights I should delete yours…

    Data? You claim they are cheaper – by how much? And how widely available – do all stores now carry?

  2. That may or may not be real for you personally but you are lowering the
    total tar and carcinogenic material you happen to
    be inhaling with an electric cigarette. Smokers who are trying hard to give up the dangerous
    habit now have the option of a new nicotine replacement therapy
    that gives them the experience and satisfaction of smoking without the harmful chemicals,
    the offensive odors and the humiliating sense of becoming social pariahs.
    Electronic cigarettes emit only a tiny fraction of nicotine that is normally emitted
    by the regular cigarette.

  3. One of the biggest problems preventing widespread taxation of this product is the fact that it’s sold in many different forms. A standard refill cartridge looks the same as the end of a cigarette, but it contains about as much nicotine as a full pack of cigarettes. So, would a pack of five refill cartridges be taxed like five cigarettes, or five packs of cigarettes? How would it affect those who buy their nicotine liquid by the bottle? One bottle may contain as much nicotine as a carton or more of cigarettes.

    I do wonder about your assertion that the demand for the product is dropping, though. Reportedly the Lorillard-owned Blu is now selling more than ever, and an analysis of popular websites using sources such as Compete and Alexa suggests that merchants are receiving more traffic than ever before.

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