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Measuring welfare changes from commodity price stabilization in small open economies

  • Coleman, Jonathan R.
  • Jones, Chris
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    The authors extend the widely used Newbery and Stiglitz (1981) approach to measuring welfare changes from commodity price stabilization to a general equilibrium setting. They derive the welfare changes in terms of net consumer and producer surplus, rather than in terms of producer income as in the Newbery and Stiglitz approach. The authors present formulas for measuring the welfare changes for domestic price stabilization achieved through profitable storage (as assumed by Newbery and Stiglitz) and for stabilization through a variable tariff scheme. These formulas differ significantly, so it is inappropriate to use the Newbery and Stiglitz formula to justify the use of domestic price controls such as a variable levy. In recent years, governments in many developing countries have liberalized their trade policies in the pursuit of improved economic performance. But this has exposed their economies to variations in international prices and raised questions about the desirability of domestic price stabilization programs. A popular mechanism for this purpose is a variable import levy scheme. The authors'analysis confirms that domestic welfare is lower under trade policies that stabilize domestic prices, as such policies serve only to shift the price uncertainty from producers and consumers to the government budget - while incurring the social costs of the distortionary tariffs and subsidies. The authors focus on a comparison of the welfare effects of price stabilization under a variable tariff scheme and storage, but suggest a better option: to use financial instruments for hedging against commodity price risks. This requires that there be no capital controls - one of the main reasons private insurance is seldom undertaken in developing countries.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1021.

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    Date of creation: 30 Nov 1992
    Date of revision:
    Handle: RePEc:wbk:wbrwps:1021
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    1. Bieri, Jurg & Schmitz, Andrew, 1973. "Export instability, monopoly power, and welfare," Journal of International Economics, Elsevier, vol. 3(4), pages 389-396, November.
    2. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November.
    3. Graham, Daniel A, 1981. "Cost-Benefit Analysis under Uncertainty," American Economic Review, American Economic Association, vol. 71(4), pages 715-25, September.
    4. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
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    11. Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178.
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