Export taxes versus buffer stocks as optimal export policies under uncertainty

Optimal state-dependent export taxes and costly-to-store buffer stocks are compared in their welfare implications for an exporter possessing monopoly power in the international trade of a volatile commodity. Optimal stochastic control is used to derive the optimal buffer stock rules. It is shown that, if the internal and external fluctuations facing the exporter are large, if the storage costs are low, and if the price elasticity of export supply is small relative to that of export demand, the exporter would gain more from a buffer stock than from a optimal export tax. World welfare is always increased by buffer stocks, as opposed to tariffs; and, under some conditions, the foreign country might also benefit and, hence, not retaliate.