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Price Expectations and the Welfare Gains from Price Stabilization
Author(s) -
Turnovsky Stephen J.
Publication year - 1974
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1239300
Subject(s) - economics , welfare , microeconomics , rational expectations , mid price , price level , price setting , supply shock , autoregressive model , factor price , limit price , distribution (mathematics) , market price , econometrics , adaptive expectations , monetary economics , mathematics , monetary policy , mathematical analysis , market economy
The gains from price stabilization are analyzed in the case where supply decisions are made before the actual market price is known and so are based on price expectations. Two expectations generating mechanisms are considered—the “adaptive” scheme and the “rational” hypothesis. In both cases price stabilization provides an overall welfare gain that is higher than when supply depends upon actual prices. The distribution of these gains among producers and consumers is shown to depend crucially upon how the expectations are generated, as well as the source and autoregressive properties of the random price fluctuations.