This paper considers the case where price instability is brought about by demand shocks where unlike most of the earlier literature it was due to sup-ply instability. The results are based on a classical welfare economics framework as this is the case for much of the analysis on price instability. Our conclusions are very different from those derived from the earlier liter-ature that includes the recent work by Schmitz & Chegini (Schmitz & Chegini, 2020) , Schmitz (Schmitz, 2021) . We show that there can be a net gain from price instability. Given that both consumers and producers prefer price in-stability, there is no need for storage. Hence, storage leads to a second-best situation. The debate over whether the private or public sector should engage in storage does not arise. Our results clearly show that the net cost and bene-fits from a stabilization policy critically depend on the nature of the price in-stability.
KeywordsPrice InstabilityRiskStorage
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