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Measuring welfare changes from commodity price stabilization in small open economies

Author

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  • Coleman, Jonathan R.
  • Jones, Chris

Abstract

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.

Suggested Citation

  • Coleman, Jonathan R. & Jones, Chris, 1992. "Measuring welfare changes from commodity price stabilization in small open economies," Policy Research Working Paper Series 1021, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1021
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    References listed on IDEAS

    as
    1. Avinash Dixit, 2005. "Trade And Insurance With Imperfectly Observed Outcomes," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 5, pages 75-84 World Scientific Publishing Co. Pte. Ltd..
    2. Avinash Dixit, 2005. "Trade And Insurance With Moral Hazard," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 4, pages 53-74 World Scientific Publishing Co. Pte. Ltd..
    3. Newbery, David M, 1984. "Commodity Price Stabilization in Imperfect or Cartelized Markets," Econometrica, Econometric Society, vol. 52(3), pages 563-578, May.
    4. James Dunn & Dale M. Heien, 1982. "The Gains from Price Stabilization: A Quantitative Assessment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 64(3), pages 578-580.
    5. Avinash Dixit, 1989. "Trade and Insurance with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 235-247.
    6. Stephen J. Turnovsky, 1974. "Technological and Price Uncertainty in a Ricardian Model of International Trade," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 201-217.
    7. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-1082, December.
    8. Benton F. Massell, 1969. "Price Stabilization and Welfare," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 284-298.
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    11. John S. Flemming & Stephen J. Turnovsky & Murray C. Kemp, 1977. "On the Choice of Numeraire and Certainty Price in General Equilibrium Models of Price Uncertainty," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 573-583.
    12. P. B. R. Hazell & P. L. Scandizzo, 1975. "Market Intervention Policies When Production Is Risky," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 57(4), pages 641-649.
    13. 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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    Cited by:

    1. Rueda-Junquera, Fernando, 1998. "Regional integration and agricultural trade in Central America," World Development, Elsevier, vol. 26(2), pages 345-362, February.

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