Working Papers in Economics,
University of Bergen, Department of Economics

Abstract: This paper studies measurement of welfare e¤ects, transient and permanent, of stabilizing or deregulating prices in Cobweb-like settings. As in Cobweb-models, producers must commit inputs in face of uncertainty. Here, however, we consider producers who are concerned with adaptations of inputs rather than price predictions. This shift of emphasis reflects two things. First, since persistent randomness causes on-going price fluctuations, point predictions are of modest concern. Second, producers are likely to care more about profits than prices. Explored below are economic issues related to transitions between regulated and unregulated equilibrium. Our focus is on convergence, stability and welfare. The main motivation and the running example centers on agricultural commodities. The paper does, however, not review the case for or against market intervention. In stead it advocates and illustrates the use of tractable tools called stochastic approximation. These tools easily produce quantitative estimates to facilitate discussion of the pros and cons.

Keywords: Keywords: price stabilization; cobwebs; convergence; stochastic approximation.

JEL-codes: C63; D60; L51; Q11

28 pages, June 15, 2006

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