1979 Articles

The Theory of Commodity Price Stabilization Rules: Welfare Impacts and Supply Responses

Stiglitz, Joseph E.; Newbery, David M. G.

It is the aim of this paper to suggest an alternative framework for the analysis of commodity stabilisation schemes, based on more secure micro-economic foundations. We begin with what might be termed the general theory of partial (or incomplete) price stabilisation. This meets objection (vi) above, and shows how the shape of the demand schedule and the source and specification of risk influence the size and distribution of welfare gains. It therefore allows the reader to appreciate the importance of the more detailed model specification which is required to investigate the remaining questions. This new model allows one to distinguish between the short run and long run impact of stabilisation, and to examine the importance of risk aversion and individual supply elasticity on the distribution of gains and losses from partial stabilisation. In particular, we do not discuss the dynamics of price stabilisation in the paper (price expectations, learning, the stochastic nature of buffer stocks, etc.), nor do we model demand uncertainty, the macro-economic impact of risk and stabilisation, market imperfections, interactions with future markets, private speculators, with other commodities, and a host of other important issues. For these, and for a more detailed exposition of some of the key concepts presented here, the interested reader is referred to our forthcoming book (Newbery and Stiglitz, 1980). Finally, we should point out that the buffer stock rules analysed here are not optimal rules, which can only be derived from complete dynamic analysis, as derived and discussed in the book 1 Turnovsky (1978a) examines a simple parameterisation of a partial stabilisation scheme, but restricts the analysis to the linear Waugh-Oi-Massell case.