Gluts, Dearths and Market Efficiency

Paper number: 95/20

Year: 1995

Paper Category: Discussion Paper

Authors

Jane Black and David de Meza

Abstract

It is shown that when enforcement costs result in market incompleteness there is a presumption of efficiency gains from sunbsidising activities subject to systematic output risk. So, for example, if there is a chance of crop failure leading to famines, everyone may gain from subsidising food production. This is true whether endogenous price movements make the real income of farmers more or less volatile than that of other groups. It is also demonstrated that even in a closed economy introduction of an unambiguously more productive technology may make everyone worse off.

*Fragments of this paper crept into seminars at Keele, Leicester, Manchester and Warwick and we appreciate the comments.