Background:
Although smoking prevalence and intensity in Serbia have decreased in recent years, expenditures on tobacco products still represent a significant portion of household budgets. As households have limited resources at their disposal, consuming tobacco means that they spend less on other items such as food, clothing, education, and health care. This is particularly true for low-income households, for whom the pressure on the household budget is even higher.

Objective:
We estimate the effect of tobacco consumption on other consumption items.

Methods:
We use an approach that includes a combination of seemingly unrelated regression and instrumental variables. Besides estimating the overall effect, we analyze the differences in effects between low-, medium- and high-income households.

Results:
Expenditures on tobacco reduce consumption on food, clothing, and education and increase the budget shares spent on complementary consumption items such as alcohol, hotels, bars, and restaurants. In most cases the effects are more pronounced for low-income households than for other groups. The results suggest that aside from the negative effects of tobacco consumption on health, it also distorts the household consumption structure, while affecting intra-household allocation and future health and development of other household members. The results from this research underline the negative effect that tobacco expenditures have on consumption of other products. The only way for households to decrease expenditures on tobacco is to stop smoking, as the demand of those who continue smoking changes less than cigarette prices.

Conclusions:
To ensure that households stop smoking and instead direct their expenditures towards more productive purposes, the Serbian government should adopt new policies and strengthen enforcement of existing tobacco control measures.