Market Intervention Policies When Production Is Risky

Abstract

Abstract The supplies of many agricultural commodities involve important production risks. In analyzing market intervention policies, these risks should enter the analysis as stochastic elements in the slope of the supply function and not just in the intercept term. This specification leads to the result that optimally distorted prices are more efficient for social welfare than competitive market equilibrium prices. Important gains in social welfare may be obtained with risky products through the appropriate use of production quotas and price stabilization schemes designed to optimally distort the market.