Measuring Welfare Changes from Commodity Price Stabilization: Case Study of Import Tariff in Indonesia’s Rice Market in 2001-2005

There has been an extensive debate on the role of government intervention in the rice market in Indonesia. The arguments have converged to the point where they agree that rice policy has reduced price variability, but there is no real consensus on the consequences for domestic welfare. The Indonesian government had used buffer stock scheme to stabilize rice price during 1963-1998 before liberalized the market only for one year in 1998-1999. Then trade policy has been implemented since 2001 by imposing an import tariff on rice. This new policy raises an interesting question on how much the welfare effects of the tariff on domestic welfare. Using partial equilibrium analysis, this paper analyses and estimate the welfare effects of rice price stabilization scheme using trade policy instruments during 2001-2005 in which the open import period applies. The welfare equation developed by Coleman and Jones (1992) and Jones (1995a) as the extension of Newbery and Stiglitz (1981) approach are used to capture the effects of Indonesia’s rice price variability on domestic welfare. The estimates show that both hypothetical and actual stabilization schemes create aggregate domestic welfare loss which originates from consumption and production inefficiency. Within the aggregate result, it is also shown that the risk benefits are smaller than the fall in mean surplus for consumers and producers. Therefore, there is no support for the view that using trade policy to stabilize rice price provides risk benefit for consumers and producers.