The effectiveness of Hong Kong's 2022 E-cigarette ban

Figure#1 illustrates market failure from overconsumption of e-cigarettes pre-ban. The Social Marginal Benefit (SMB) is less than the Private Marginal Benefit (PMB) as PMB is not reflecting the cost to society of consuming e-cigarettes. The vertical difference between SMB and PMB displays the NEC of vapes (e.g. health consequences). In the free-market, e-cigarette consumers will maximise their private utility, and consume at quantity traded in the market (Qm), where PMB intersects with PMC. The differencebetween Qm to Qopt, the socially optimal consumption (SMB=SMC) represents overconsumption of e-cigarettes. However, based on HKG's objective of a "Smoke-free Hong Kong '', this suggests the NEC is larger than anticipated. Ergo, the Government believes the socially optimal consumption is zero, with supply completely eliminated from Qm to Qgovt. Hence, a welfare loss (ABCQm) is created, displaying the social surplus lost due to overconsumption of e-cigarettes.

Nevertheless, the results within the survey illustrate continued e-cigarette consumption, proving the ban has failed to eliminate supply at all price-levels. After regulations were enforced, quantity-demanded decreased from 61 of 82 applicants, to 45, highlighting a fall in consumption of 16 people. Out of these 45 applicants, 14 people declared they’d continue to purchase these products from stores, compared to 27 who are now receiving from dealers, online or through friends.

Displayed in Figure 2 above, the ban didn’t completely succeed in eliminating supply as the data suggests there is still an existence of black-markets sellers and unofficial imports. Supply will reduce by a limited extent where PMC shifts to PMC₂, as unauthorised sellers can trade contraband and skirt pricecontrols to earn a higher revenue resulting in prices rising from Pm to Pm₁. As e-cigarettes are addictive, consumers are willing to pay higher prices to acquire the product. Quantity-demanded falls alongside Qm  to Qm₁  despite increases in production costs and risks that prompted several producers to shut down as e-cigarettes are illegal.

his might be because the HKG overestimated the fall in consumption post-ban, as personal consumption is still allowed and those who previously used/stocked-up on e-cigarettes, will continue to use it. Furthermore the government overlooked the existence of black-markets that continue to sell towards consumers, displaying an increase in welfare loss (ABCQm to DECQm) and inability to eliminate externalities.

The primary research of this investigation consisted of an online survey sent in June-July 2022 - 82 responded. The data is separated into three different age categories - Adolescents, Young Adults, Adults - based on potential non-price determinants that could impact their choice. This sample size and variation of consumers' ages allowed for observations to determine a general-trend between e-cigarette demand and price.

The PED measurement is used to identify the responsiveness of quantity-demanded by HK’s population to changes in price. This is calculated in the formula below -

\( PED =\frac{Percentage change in Quantity Demanded}{Percentage change in price}\)

where -

\(percentage \, change \, in\,quantity \,demanded\,=\frac{Q2-Q1}{Q1}×100\)

\(Percentage \,change = \frac{P1}{P2-P}×100\)

Vape-pods and juice were chosen as products of investigation as both are complementary goods of e-cigarettes. An approximate value of these products were formulated through online research (“Relx HK 悅刻香港, Gippro | 香港電子煙及煙彈專門網購店 | vape Hong Kong”)(“狼煙 | 香港悅刻專門店 | 主頁”) and an theoretical $50HKD increase in price post-ban was assumed based on anecdotal evidence.

Survey Questions 13-16 (See Appendix A), displays the questions incorporated to calculate consumers' changes in e-cigarette consumption pre-ban and post-ban and determine if price increase is a principal determinant. Addiction, substitutes, income, and legalities were used to explain age-group PED values. Raw Data of Survey Responses 13-16 (See Appendix B), shows the amount purchased for each product from 1-11+ times per week. Thus, determining the ban’s effectiveness in limiting e-cigarette demand.

Sample Worked Calculations of PED for vape-juice in Adolescents -

Percentage change in Quantity-demanded for vape-juice

\(\frac{43-60}{60}×100=(-)28.33\%\)

Percentage change in Price for vape-juice

\(\frac{250-200}{200}×100=25.00\%\)

Price Elasticity of Demand

\(\frac{(-)28.33}{25.00}×100=(-)1.13\)

= The PED is Elastic as the value is above (-1)

*See Appendix D for the worked calculations for vape-pods (Adolescents)

Figure#3 and Table#3 reveal vape-pods exhibited inelastic demand among under-18s, with a PED of (-)0.61. The 50% price increase from $100HKD to $150HKD (Pe to P1) influenced adolescents' vape-pod demand to drop from 216 to 150 pods (Qe to Q1)

This value was unexpected as my hypothesis stated it would be elastic (see Table#1). This demand inelasticity can be explained by the various flavours (e.g. menthol, berry) and smell associated with pods, attracting the youth as they can select a preferred taste. Unlike cigarettes, which have a higher cost-per-use and fewer flavours. Moreover, e-cigarettes are convenient and concealable because they produce a vapour smoke detectors cannot detect. As users become more reliant, quitting post-ban becomes harder, creating inelastic demand.

E-cigarettes require pods (compulsory product) to function. Some may consider it to be more essential than vape-juice. It's possible individuals can receive juice from their peers as its liquid state makesit easily-divisible. Pods are more difficult to share because they are a single unit and often come prefilled with juice, limiting adolescents' need to purchase vape-juice. Despite this 50% price increase, it's still cheaper than juice, meaning it will take up a smaller proportion of their "income". Therefore, this is likely to be attractive to adolescents, where price should be the most significant determinant compared to other non-price determinants, explaining the inelasticity.

Additionally, some adolescents might begin vaping to fit into the social norm, displaying bandwagon bias. Likewise, hyperbole bias exists, whereas "teenagers" are often more oblivious to long-term effects and, instead, focus on the short-term. In this case, ignoring health concerns and rising prices and deciding to continue to purchase e-cigarettes, whether to "fit in", addiction or to quit smoking, all these options illustrate why the demand is inelastic.

Figure#4 and Table#3 show the PED values for vape-juice for under-18s were (-)1.13, indicating elastic demand. The 25% price increase from $200HKD to $250HKD (Pe to P1)  prompted adolescents to reduce their juice demand from 60 to 43 bottles (Qe to Q1).Their limited income from parents' allowances or minimum-wage jobs explains the fall in consumption, where price increases will result in vape-juice taking up a higher proportion of their "income". Thus, some might elect to spend  $250HKD elsewhere instead as it becomes more difficult for those under 18 to purchase post-ban as black-market sellers are hesitant to sell as they're not over the legal age, even pre-ban. If caught, not only would they receive a potential maximum fine of $50,000HKD and six months of imprisonment, but selling to a minor can result in further punishment ("Hong Kong Police Make First E-Cig Ban Arrests"). Some adolescents may become reluctant to purchase this as it becomes less accessible and inconvenient to source.

Table#4 displays vape-juice had an elastic demand of 1.55 and vape-pods 0.33. The hypothetical non-price determinants (see Table#1) prevented me from expecting an elastic value for vape-juice, even though vape-pods matched my hypothesis. 3 vape-pods (Q1-Qe) and 9 vape-juice (Q1-Qe) units were consumed, irrespective of the 50% and 25% price increases. These results contradict the law of demand, as shown in Figures #4 and #5, where when price increases, quantity-demanded decreases. As e-cigarettes are only available through dealers, e-commerce, or friends, all of which carry risks, young adults stock up on vape-pods/juice when they trade to limit the possibility of getting caught as less interactions between parties limits suspension from authorities. Alternatively, the limited sample-size received within this age group could justify the positive-relationship. Two outliers (see Appendix C) with rising consumption contradict my hypothesis. These results cannot be extrapolated to the whole population.

The inelastic value for vape-pods could have resulted from consumers being less price conscious where they have similar spending habits as adolescents. Whereas, the elastic value for vape-juice can be explained by many young adults being students or recent graduates with low-incomes. As juice is more expensive than pods, this might deter young adults from purchasing as it takes up more of their disposable income. This was also seen for adolescents (allowances), but young adults are also responsible for paying their living fees (e.g. rent, food, etc.).