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The Simple Analytics of Commodity Futures Markets: Do They Stabilize Prices? Do They Raise Welfare?

Quarterly Review 1432 | Spring 1990

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Authors

Ravi Jagannathan

The Simple Analytics of Commodity Futures Markets: Do They Stabilize Prices? Do They Raise Welfare?

Abstract

This paper uses a simple, graphical approach to analyze what happens to commodity prices and economic welfare when futures markets are introduced into an economy. It concludes that these markets do not necessarily make prices more or less stable. It also concludes that, contrary to common belief, whatever happens to commodity prices is not necessarily related to what happens to the economic welfare of market participants: even when futures markets reduce the volatility of prices, some people can be made worse off. These conclusions come from a series of models that differ in their assumptions about the primary function of futures markets, the structure of the industries involved, and the tastes and technologies of the market participants.


Parts of this paper have been published in a paper co-authored with Larry Jones: "Price Stability and Futures Trading in Commodities," _Quarterly Journal of Economics_ (May 1990, Vol. 105, Iss. 2, pp. 527–534), https://doi.org/10.2307/2937798.