TITLE:
Societal Gains from Price Stability: Does Risk Matter?
AUTHORS:
Andrew Schmitz, Claudine Chegini
KEYWORDS:
Price Stability, Risk
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.2,
March
10,
2023
ABSTRACT: The theory of commodity storage and price stabilization has a long
history. Schmitz & Chegini (2020) develop a price stabilization model under
complete price certainty and conclude that storage, when carried out by
producers, provides net societal benefits. Schmitz (2021) relaxes these
assumptions, in a price risk model that distinguishes between producer ex ante
decisions and ex post outcomes. Producers are assumed to make production
decisions ex ante using a planning supply curve but ex post the outcome is
different than that expected. In the price risk model, deviation from the planning
supply curve is caused by supply shocks that are generated from production
shocks, rather than from the shift in supply curves, as assumed in the price
certainty models. The risk price model generates identical welfare results to
the model developed under complete price certainty. With storage, society on
net prefers price stability over instability.