Political Economy of Agricultural Commodity Market Intervention

Pinhas Zusman
March 1992  [92-GATT 13]

Commodity markets are characterized by trade in standardized, undifferentiated commodities and numerous traders. Consequently, such markets are highly competitive and trade is carried out in concentrated, low transaction cost exchanges. In this sense, commodity markets are the closest approximations to ideal neoclassical competitive markets. As commodity markets area also free of externalities, the resulting market equilibria are economically efficient. Nevertheless, owing to imperfect foresight and random shocks, the dynamic performance of commodity markets, may be suboptimal. Also, commodity markets' actual performance as exchange institutions may at times fall short of the theoretical ideal. Hence, some room ordinarily exists for efficiency enhancing intervention in the form of setting commodity quality standards, disseminating relevant trade information and establishing appropriate transaction procedures. In addition, commodity markets' stabilization programs offer a wide scope for improving the dynamic market performance; indeed, market stabilization objectives are often invoked as political justification of redistributive policies.

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