Buffer stocks are better stabilizers than quotas

Michael Pelcovits (1979, p. 307) recently showed that with an unstable foreign excess supply curve, either a fixed quota or a buffer stock program with a fixed tariff can be used to stabilize domestic price at a given level, and both policies 'will have the same effect on social welfare [so...t]he choice between [the two...] must then be made on the basis of administrative cost and feasibility'. However, he reached his conclusion by ranking the two policies on the basis of domestic welfare, and in this note we demonstrate with his same model that on the basis of foreign welfare the buffer stock is better than the quota. Thus, world welfre is higher under the buffer stock than under the quota. © 1981.

Duke Scholars

Author Edward Tower Economics