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Optimal food price stabilisation policy

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  • Gouel, Christophe

Abstract

This paper proposes a framework for designing optimal food price stabilisation policies in a self-sufficient developing country. It uses a rational expectations storage model with risk-averse consumers and incomplete markets. Government stabilises food prices by carrying public stock and by applying a state-contingent subsidy/tax to production. The policy rules are designed to maximise intertemporal welfare. The optimal policy under commitment crowds out all private stockholding activity by removing the profit opportunity from speculation. The countercyclical subsidy/tax to production helps price stabilisation by subsidising production in periods of scarcity and by taxing it in periods of glut. It contributes little to welfare gains, most of which come from stabilisation achieved through public storage.

Suggested Citation

  • Gouel, Christophe, 2013. "Optimal food price stabilisation policy," European Economic Review, Elsevier, vol. 57(C), pages 118-134.
  • Handle: RePEc:eee:eecrev:v:57:y:2013:i:c:p:118-134
    DOI: 10.1016/j.euroecorev.2012.10.003
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    Keywords

    Food price stabilisation; Incomplete markets; Risk-aversion; Storage;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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