Optimal food price stabilisation policy

This paper proposes a framework for designing optimal food price stabilisation policies in a self-sufficient developing country. It uses a rational expectations storage model with risk-averse consumers and incomplete markets. Government stabilises food prices by carrying public stock and by applying a state-contingent subsidy/tax to production. The policy rules are designed to maximise intertemporal welfare. The optimal policy under commitment crowds out all private stockholding activity by removing the profit opportunity from speculation. The countercyclical subsidy/tax to production helps price stabilisation by subsidising production in periods of scarcity and by taxing it in periods of glut. It contributes little to welfare gains, most of which come from stabilisation achieved through public storage.

▸ We develop a framework for designing optimal food price stabilisation policies. ▸ Public intervention is justified by risk aversion and market incompleteness. ▸ The stabilisation is brought by public storage and a subsidy/tax to production. ▸ The optimal storage policy crowds out all private stockholding activity. ▸ The countercyclical production policy acts by making production more elastic.