Optimal Food Price Stabilization in a Small Open Developing Country

In poor countries, most governments implement policies aiming to stabilize the prices of staple foods, which often include storage and trade measures insulating their domestic market from the world market. It is of crucial importance to understand...

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Bibliographic Details
Main Authors:	Gouel, Christophe, Jean, Sebastien
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	AGRICULTURAL PRICE AGRICULTURAL PRICES AGRICULTURAL TRADE AGRICULTURE ARBITRAGE ARBITRAGES AVERAGE PRICE AVERAGE PRICES BARRIER BARRIERS TO TRADE BEHAVIOR OF PRICE BENCHMARK BINDING CONSTRAINTS BORDER PRICE BUFFER STOCKS CASH FLOWS CLOSED ECONOMY COMMERCIAL POLICY COMMODITIES COMMODITY COMMODITY PRICE COMMODITY PRICES CONSUMERS DEMAND ELASTICITY DEMAND FUNCTION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMY DEVELOPMENT POLICY DISCOUNTED VALUE DISTRIBUTION OF TRADE DOMESTIC MARKET DOMESTIC MARKETS DOMESTIC PRICE DOMESTIC PRICES DOMESTIC PRODUCTION DOMESTIC STOCKS ECONOMETRICS ECONOMICS EQUATIONS EXCESS SUPPLY EXPECTED UTILITY EXPECTED VALUE EXPECTED VALUES EXPENDITURE EXPENDITURES EXPORT BANS EXPORT PARITY EXPORT RESTRICTIONS EXPORT SUBSIDIES EXPORT TAX EXPORT TAXES EXPORTS FINANCIAL ASSETS FOOD PRICE FOOD PRICES FOREIGN GOODS FOREIGN TRADE FREE TRADE GLOBAL MARKET GOVERNMENT INTERVENTIONS IMPORT COMPETITION IMPORT PARITY IMPORTS INCOME ELASTICITY OF DEMAND INCOMPLETE MARKETS INEFFICIENCY INFLATION INSURANCE INSURANCE MARKET INSURANCE MARKETS INTEREST RATE INTERNATIONAL COOPERATION INTERNATIONAL ECONOMICS INTERNATIONAL TRADE INVENTORIES INVENTORY LOW-INCOME COUNTRIES MARGINAL BENEFITS MARGINAL COST MARGINAL UTILITY MARGINAL VALUE MARKET EQUILIBRIUM MONOPOLY MULTIPLIERS NATIONAL INCOME NET EXPORTS OPEN ECONOMY OPPORTUNITY COST OPPORTUNITY COSTS OPTIMIZATION OUTPUT POLITICAL ECONOMY PORTFOLIO POSITIVE TARIFFS PRICE BAND PRICE CEILING PRICE CHANGE PRICE CHANGES PRICE CURVE PRICE CURVES PRICE DISTORTIONS PRICE ELASTICITY PRICE ELASTICITY OF DEMAND PRICE FLUCTUATIONS PRICE INSTABILITY PRICE LEVEL PRICE LEVELS PRICE POLICY PRICE STABILITY PRICE STABILIZATION PRICE UNCERTAINTY PRICE VOLATILITY PRODUCTION FUNCTION PROFIT SEEKING PUBLIC POLICIES PUBLIC POLICY PURCHASING REAL INCOME RISK AVERSE RISK AVERSION RISK NEUTRAL RISK PREMIUM SALE SAVINGS SECURITY CONCERNS SMALL COUNTRY SMALL ECONOMY SOCIAL WELFARE STABILIZATION POLICIES STABILIZATION POLICY STOCK MARKET STOCK PRICE STOCKS SUPPLY CURVES SUPPLY ELASTICITY SURPLUS SURPLUSES TARIFF POLICY TARIFF REDUCTION TAX TAXATION TERMS OF TRADE TRADE BALANCE TRADE BARRIER TRADE DISCIPLINES TRADE MODEL TRADE MODELS TRADE OPENNESS TRADE POLICIES TRADE POLICY TRADE RESTRICTIONS TRADE TAXES TRADES UTILITY FUNCTION WEALTH WORLD MARKET WORLD MARKETS WORLD TRADE
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120110112649 http://hdl.handle.net/10986/3228

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Summary:	In poor countries, most governments implement policies aiming to stabilize the prices of staple foods, which often include storage and trade measures insulating their domestic market from the world market. It is of crucial importance to understand the precise motivations and efficiency of those interventions, because they can have consequences worldwide. This paper addresses those issues by analyzing the case of a small, open developing country confronted by shocks to both the crop yield and foreign price. In this model, government interventions may be justified by the lack of an insurance market for food prices. Considering this market imperfection, the authors design optimal public interventions through trade and storage policies. They show that an optimal trade policy largely consists of subsidizing imports and taxing exports, which benefits consumers at the expense of producers. Import subsidies alleviate the non-negativity of food storage. In other words, when stocks are exhausted, subsidizing imports prevents domestic price spikes. One striking result: an optimal storage policy on its own is detrimental to consumers, since its stabilizing benefits leak into the world market and it raises the average domestic price. By contrast, an optimal combination of storage and trade policies results in a powerful stabilizing effect for domestic food prices.

Optimal Food Price Stabilization in a Small Open Developing Country

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