This paper shows that, in the absence of a complete set of risk markets, prices provide incorrect signals for guiding production decisions. Even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period, the market allocation is, in general, not a constrained Pareto optimum. Essentially the only conditions under which, for all technologies, the market equilibrium is a constrained Pareto optimum are those in which risk markets are redundant. We derive the necessary and sufficient conditions for redundancy of risk markets, which turn out to be extremely restrictive.

This paper analyzes the effect of commodity price stabilization on producers and consumers, both in the short run, and in the long run, when producers have adjusted their production decisions to take account of the change in the price distribution. We derive conditions under which (a) both producers and consumers may be better off; and (b) both producers and consumers may be worse off. Moreover, we show that the long-run effects may differ not only quantitatively but also qualitatively from the short-run effects. The anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers.