THEORY OF COMMODITY PRICE STABILIZATION RULES - WELFARE IMPACTS AND SUPPLY RESPONSES

Commodity price stabilisation schemes being topical, the authors examine their operation in a more realistic model than that often used. This relaxes these common assumptions: linear demand and supply curves with additive stochastic disturbances; the same ex ante as ex post supply curves; simple welfare assumptions; absence of a measure of the welfare effects of stabilising price in itself; the assumption of perfect, costless price stabilisation; producers failing to learn and react to the changing average returns caused by stabilisation schemes; all farmers having the same atttude to risk. Theoretical analysis suggests that it may be difficult to assess the desirability of buffer stock schemes without knowledge of certain critical parameters such as the elasticity of effort response and the elasticity of demand but that even with a more complex model it is possible to quantify the benefits of price stabilisation. -V.S.Mead