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http://www.bized.co.uk Government Intervention in Markets Buffer Stocks Income Guarantee Schemes and Price Controls Copyright 2006 – Biz/ed http://www.bized.co.uk Buffer Stocks Copyright 2006 – Biz/ed http://www.bized.co.uk 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 volatile – Assumption: supply is perfectly inelastic in short run – Only useful where goods can be stored! Copyright 2006 – Biz/ed http://www.bized.co.uk Government Intervention in Markets S (Bad harvest) S (Good Harvest) Price Buffer Stock to stabilise price TP Target Price After After aa good bad harvest harvest, the Government government government sets a target‘buys up’ releases 60(TP) units 50 and onto price puts market them into store D 50 100 160 Quantity Bought and Sold Copyright 2006 – Biz/ed http://www.bized.co.uk Income Guarantee Schemes Copyright 2006 – Biz/ed http://www.bized.co.uk 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 Copyright 2006 – Biz/ed http://www.bized.co.uk Government Intervention in Markets Bad harvest S – Good Price per ton S –S1 S2 harvest S Income stabilisation schemes 12.5 10 8 Desired income Income levels maintained level at £1000 per ton = £1000 per ton Income Level = £1000 per ton D1 (PED = -1) In a harvest, In a bad good harvest supply falls to 80 to supply increases D1 shows Assume average 125 (S2) To keep incomes combinations yearly supply =of P constant, government 100 Government buys and Q that would releases fifteen onto up 13incomes units maintain incomes Farm = market – price rises to at £1000 per ton £1000 -12.5 pricesper fallton to 8 D 80 95 112 100 125 Quantity Bought and Sold Copyright 2006 – Biz/ed http://www.bized.co.uk Government Intervention in Markets • Problems of such schemes: – Farmers do not respond to market signals market becomes distorted – Overproduction if incomes guaranteed – Moral issues of storing food – Cost of storage – Imperfect knowledge of the market – Long term sustainability, international effects – LDCs, World Trade Organisation Copyright 2006 – Biz/ed http://www.bized.co.uk Government Intervention in Markets Price Price Controls: Maximum prices below normal equilibrium S Black Market Price £18 £10 P Max £6 Suppliers reduce thelead Shortages may the equilibrium amount offered to 60 but The government toAssume black market price is would £10 and demand risethe to imposes a maximum prices way amount bought and 140 creating aabove shortage price of £6 (P Max) 100 the free ofsold 80equilibrium –isrationing might have to belevel introduced market D 60 100 140 Quantity Bought and Sold Copyright 2006 – Biz/ed http://www.bized.co.uk Government Intervention in Markets Price Price Controls: Minimum prices set above normal equilibrium S Min P £9 £5 Example – Minimum At the higher price, Wage Legislation in Assume initial Government demand would fall equilibrium price = £5, the UK – in theory imposes minimum whereas supply and amount bought should lead to price of £9 (Min P) would rise – and sold = 200a but unemployment surplus would exist. in reality? D 170 200 240 Quantity Bought and Sold Copyright 2006 – Biz/ed