Illegal markets for cigarettes and e-cigarettes

This paper discusses the long-standing illegal markets for cigarettes and the more recently emerged illegal markets for e-cigarettes. We identify three distinctive market fundamentals that help explain many features of the illegal markets. First, in contrast to some illegal goods, many countries have sizable legal markets for cigarettes and e-cigarettes alongside the illegal markets. In 2024, tobacco products generated almost $1 trillion in revenues; e-cigarettes generated $26 billion dollars. It is estimated that illegal markets account for about 10 percent of global cigarette consumption. Second, the illegal markets have arisen to evade high excise taxes that increase prices and regulations that restrict the availability of desirable features of legal products. The taxes and regulations have been adopted as public health measures with the goal of reducing tobacco consumption; however, these same policies drive the formation of illegal markets. Third, demand-side linkages mean that taxation, regulatory, and enforcement policies targeted at legal and illegal markets for cigarettes will affect legal and illegal markets for e-cigarettes, and vice versa. The connection between the markets means regulatory policy for one product can drive consumers both to the illegal market for the product and to the legal and illegal market for the other product.