Efficient Equalization Funds for Farm Prices

Wilfred Candler and Alastair McArthur

American Journal of Agricultural Economics, 1968, vol. 50, issue 1, 91-110

Abstract: The objective of an equalization fund is to "accept" a series of market prices over a period of time and transform these into equalized prices to farmers, so that the equalized prices have a lower variance than the original market prices. An arrangement which minimizes the variance of equalized payments for a given variance of the equalization fund is said to be efficient. The derivation of efficient funds is considered for the case where prices are independent and autocorrelated (for one year). Quantity supplied is taken to be independent of price, but price is a function of quantity. It is shown that the "instinctive" suggestion of an equalized price calculated as a moving average, with equal weights, of previous prices, is appropriate only if fluctuations in the equalization fund are of no interest.

Date: 1968
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