The Theory of Commodity Price Stabilisation Rules: Welfare Impacts and Supply Responses*

Commodity price stabilisation schemes are again topical, this time as a result of pressure from UNCTAD for an integrated programme on commodities as part of the 'New International Order'. Despite the long history of interest in the subject and its evident importance for developing countries the conventional analysis of the impact of price stabilisation is remarkably simplistic.^ The theory was developed by Waugh (1944), Oi (1961), and Massell (1969) and provides the basis for most subsequent theoretical investigations (of which some are presented in the references and surveyed in Turnovsky, 1978^) and empirical estimates (e.g. MacAvoy and McNicol, 1976; World Bank, 1977). The WaughOi-Massell approach assumes 'linear demand and supply schedules, instantaneous reaction of supply and demand to changes in market prices, additive stochastic disturbances and price stabilisation at the mean of the prices which would have prevailed in an unstabilised market' (World Bank, 1977), as shown in Fig. I.