Abstract
This paper investigated the welfare consequences of reducing coffee price volatility in Tanzania. GARCH (1,1) model is fitted with monthly coffee prices from 1998 to 2017 to estimate the conditional and unconditional variance of the residual. The coefficient of relative risk aversion and unconditional variance of GARCH (1,1) model are applied in a typical Lucas-like representative argent model to examine the welfare consequences of eliminating price volatility using the case of coffee farmers in Tanzania. The empirical finding shows that the welfare gain from eliminating price volatility for coffee farmers in Tanzania is small. Taking into account the effects of reforms in coffee industry and economic crisis, the welfare gain remains at 1.139% of revenue from coffee sales per year. Given that coffee market is under oligopoly stage still there is some degree of monopoly in terms of regulations thereby rising a need of “check and balance” to ensure that bureaucratic challenges are addressed. Nonetheless inclusive hedging strategies, improving production and quality of coffee, provide the next step in improving the welfare of the coffee producers where reducing coffee price volatility at a cost might not be a desirable choice. Key words: Tanzania, coffee price volatility, welfare consequences, and inclusive hedging mechanisms.  
Highlights
Coffee is an important export cash crop in Tanzania
The coefficient of relative risk aversion and unconditional variance of generalized autoregressive conditional heteroskedasticity (GARCH) (1,1) model are applied in a typical Lucas-like representative argent model to examine the welfare consequences of eliminating price volatility using the case of coffee farmers in Tanzania
This raises the debate on the welfare impact of volatility emanating from commodity prices. We address this question in the context of coffee farming households in Tanzania. To take this question into perspective in the notion of expected utility theory we employ the coefficient of relative risk aversion and unconditional variance 2 of GARCH (1,1) model in a typical Lucas-like representative argent model to examine the welfare consequences of eliminating price volatility for the case of coffee farmers in Tanzania
Summary
Coffee is an important export cash crop in Tanzania. According to coffee board (2011) annual report, coffee accounted for almost 14% of total agricultural exports and 5% of total export value in Tanzania. The estimates of export earnings from coffee have been around USD100 million per annum over the last 30 years. The coffee sector provides direct income to more than 400,000 farmers/households thereby supporting the livelihoods of an estimated 2.5 million individuals. Coffee price volatility impinges the welfare of the household involved in coffee farming and exert uncertainty on environmental degradation especially cutting trees as commodity prices volatility has been higher in 2000s relative to the preceding decades, raising concern among policymakers and various international organizations (FAO et al, 2011). The study by Morgan et al (1999) and FAO (2004) found out that supply surge, macroeconomic
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