The Theory of Food Price Stabilisation

Food price instability has important effects on consumers, which have been largely ignored in the literature on commodity price instability. This paper discusses these differences, and argues that distribution issues are central and that futures markets are not well designed to provide consumer insurance. The competitive market will undertake too little price stabilization, but a universal ration entitlement, which would act as a substitute for futures markets, would provide more cost-effective insurance. If the coverage of ration entitlements is incomplete, however, providing increased price stabilization by additional buffer stocks may be more cost effective than rations.