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Risk Aversion, Supply Response, and the Optimality of Random Prices: A Diagrammatic Analysis

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  • David M. G. Newbery
  • Joseph E. Stiglitz

Abstract

This paper analyzes the effect of commodity price stabilization on producers and consumers, both in the short run, and in the long run, when producers have adjusted their production decisions to take account of the change in the price distribution. We derive conditions under which (a) both producers and consumers may be better off; and (b) both producers and consumers may be worse off. Moreover, we show that the long-run effects may differ not only quantitatively but also qualitatively from the short-run effects. The anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers.

Suggested Citation

  • David M. G. Newbery & Joseph E. Stiglitz, 1982. "Risk Aversion, Supply Response, and the Optimality of Random Prices: A Diagrammatic Analysis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 1-26.
    • Handle: RePEc:oup:qjecon:v:97:y:1982:i:1:p:1-26.
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    File URL: http://hdl.handle.net/10.2307/1882624
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    Cited by:

    1. Brent Kreider, 2003. "Income Uncertainty and Optimal Redistribution," Southern Economic Journal, John Wiley & Sons, vol. 69(3), pages 718-725, January.
    2. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.
    3. Petreski, Marjan, 2013. "Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis," MPRA Paper 47018, University Library of Munich, Germany.
    4. Cho, In Soo, 2011. "Do Gender Differences in Risk Preferences Explain Gender Differences in Labor Supply, Earnings or Occupational Choice?," Staff General Research Papers Archive 34651, Iowa State University, Department of Economics.
    5. Gouel, Christophe, 2013. "Optimal food price stabilisation policy," European Economic Review, Elsevier, vol. 57(C), pages 118-134.

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