GOVERNMENT INTERVENTION

IN MARKETSBuffer Stocks

Income Guarantee Schemes and Price Controls

By: Nur Baladina, SP. MP.

BUFFER STOCKS

GOVERNMENT INTERVENTION IN MARKETS Buffer Stocks:

Influencing market supply through holding or releasing stocks to stabilise prices or incomes

Short term measure Used in agriculture where supply can be

volatileAssumption: supply is perfectly inelastic in

short runOnly useful where goods can be stored!

GOVERNMENT INTERVENTION IN MARKETS

Buffer Stock to stabilise price:Price

Quantity Bought and Sold

D

Target Price TP

Government sets a target price (TP)

S (Bad harvest)

10050

After a bad harvest, government releases 50 onto market

S (Good Harvest)

160

After a good harvest the government ‘buys up’ 60 units and puts it into store

INCOME GUARANTEE SCHEMES

GOVERNMENT INTERVENTION IN MARKETS Income stabilisation Schemes: Buffer stocks do not guard against

volatile incomes Aim to ensure farm incomes remain

relatively constant – manipulate price through releasing stocks or adding to stores

GOVERNMENT INTERVENTION IN MARKETS Problems of such schemes:

Farmers do not respond to market signals - market becomes distorted

Overproduction if incomes guaranteedMoral issues of storing foodCost of storage Imperfect knowledge of the marketLong term sustainability, international

effects – LDCs, World Trade Organisation

GOVERNMENT INTERVENTION IN MARKETS

Price Controls: Maximum Prices below normal equilibrium

Price

Quantity Bought and Sold

D

S

£10

100

Assume the equilibriumprice is £10 and the amount bought and sold is 100

£6 P Max

The government imposes a maximum price of £6 (P Max)

60 140

Suppliers reduce the amount offered to 60 but demand would rise to 140 creating a shortage of 80 – rationing might have to be introduced

Black Market Price

£18

Shortages may lead to black market prices way above the equilibrium free market level

GOVERNMENT INTERVENTION IN MARKETS

Price Controls:Minimum Prices set above normal equilibrium

Price

Quantity Bought and Sold

D

S

£5

200

Assume initial equilibrium price = £5 and amount bought and sold = 200

£9 Min P

Government imposes minimum price of £9 (Min P)

170 240

At the higher price, demand would fall whereas supply would rise – a surplus would exist.