Intermittent Trade Disruptions and Optimal Production

This paper develops a planning model to study the optimal production policy of a small country facing production rigidity as well as uncertain and intermittent trade embargoes. The optimal policy is completely characterized by two target production points. With minor exceptions, the effects on the target points and welfare of the stochastic process governing the imposition and lifting of embargoes, the terms of trade, the ease of adjusting production, the discount rate, and the attitude towards risk can be ascertained and are economically rather intuitive. Some issues of decentralization and government intervention are also discussed.