Abstract
Summary The paper examines the effects of stabilization policies via buffer stocks when risk-averse producers respond to the increased price stability, and thus to the lowered production risks, by enhancing their output. The paper develops a theoretical framework for incorporating the supply response to the reduction in risk and for evaluating the resulting economic gains from stabilization policies. Simulation experiments with a model of a storable agricultural commodity (grains) demonstrate the economic distributional and other gains of storage operations when there is supply response, and show that these gains are then far greater than the gains previously envisaged by models that do not take this response into account.
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