TITLE:
Search for Stability under Price Risk
AUTHORS:
Andrew Schmitz
KEYWORDS:
Commodity Stocks, Price Risk, Stabilization
JOURNAL NAME:
Theoretical Economics Letters,
Vol.11 No.4,
July
26,
2021
ABSTRACT: Society’s preference for commodity price stability
brought about by storage is supported by many researchers. However, most of the
models assume that both prices and quantities are known with certainty. Also,
the models’ price instability comes about from supply shocks where the
variation in supply is due to shifting supply curves. These assumptions have
been criticized. To relax these assumptions, we introduce a price risk model
that distinguishes between ex ante decisions and ex post outcomes, and supply
shocks are generated not from a shift in the planning supply curve, but rather,
from production deviations from it. Even when a price risk model is used,
society prefers price stability to instability—the result common in the literature.
Also, private competitive storage leads to optimal price stability and,
therefore, there is no need for government storage.