Social Welfare Effect Of Ghana Cocoa Price Stabilization: Time Series Projection And Analysis

Abstract

Wide fluctuations in the price of an agricultural product are often correlated with inelasticity of supply and/or demand for the product. The issue of whether such fluctuations are desirable or undesirable for cocoa producing countries has still to be settled. Among those who believe that price fluctuations are undesirable and should be reduced, there are divergent opinions as to how these fluctuations should be reduced. The objective of this study is to determine the effect of price stabilization on the economic welfare of producers and consumers of Ghana cocoa. Hence this study will estimate supply and demand functions for Ghana cocoa. Parameter estimates will then be used to predict social welfare gains and losses from increased cocoa price stabilization. On the demand side an increase in disposable income influences consumers positively in buying cocoa products. On the producer supply side, independent variable explained 86.5 percent of the variations in supply of cocoa by farmers. Welfare gains measured in this study do not account for additional storage costs that would be incurred by Ghana Marketing Board to make complete prices stabilization operational. Given rather unstable supply and demand functions for Ghana cocoa as indicated by their respective variances, the buffer inventory required by the Ghana Marketing Board to stabilize Ghana cocoa prices would likely be large, so is the resource cost of maintaining that buffer inventory. With respect to welfare implications, this study supports the argument that price stabilization will benefit Ghana cocoa farmers as well as consumers. Society as a whole benefits by the net gain in welfare based on Massel’s model.