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 supply 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 literature 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 instability, 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 benefits from a stabilization policy critically depend on the nature of the price instability.
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