Supply Control With Marketable Quotas: The Cost of Uncertainty

Although the importance of risk and uncertainty was recognized in the early literature on agricultural policy, more recent analyses tend to abstract from these considerations. In particular, the supply-control model, once high on the economist's agricultural policy agenda, has not been analyzed with production as a stochastic variable. This article demonstrates that supply control under conditions of uncertainty results in social costs above those predicted by certainty analysis. Special emphasis is given to (1) the variance of the implicit price the producer receives for his product, and (2) the effects of supply control on the equilibrium quantity stored. The optimality of storage in a competitive market is demonstrated, and it is argued that if equilibrium storage is increased by introducing supply control, the increased costs should be included in approximating the welfare costs of the policy.