This paper considers the case where price instability is
brought about by demand shocks where unlike most of the earlier literature it
was due to sup-ply instability. The results are based on a classical welfare
economics framework as this is the case for much of the analysis on price
instability. Our conclusions are very different from those derived from the
earlier liter-ature that includes the recent work by Schmitz & Chegini
(Schmitz & Chegini, 2020), Schmitz (Schmitz, 2021). We show that there can
be a net gain from price instability. Given that both consumers and producers
prefer price in-stability, there is no need for storage. Hence, storage leads
to a second-best situation. The debate over whether the private or public
sector should engage in storage does not arise. Our results clearly show that
the net cost and bene-fits from a stabilization policy critically depend on the
nature of the price in-stability.
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