Search for Stability under Price Risk
- 1 Department of Food and Resource Economics, University of Florida, Gainesville, USA
Abstract
Society’s preference for commodity price stability brought about by storage is supported by many researchers. However, most of the models assume that both prices and quantities are known with certainty. Also, the models’ price instability comes about from supply shocks where the variation in supply is due to shifting supply curves. These assumptions have been criticized. To relax these assumptions, we introduce a price risk model that distinguishes between ex ante decisions and ex post outcomes, and supply shocks are generated not from a shift in the planning supply curve, but rather, from production deviations from it. Even when a price risk model is used, society prefers price stability to instability—the result common in the literature. Also, private competitive storage leads to optimal price stability and, therefore, there is no need for government storage.
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