1. Buffer Stocks Income Guarantee Schemes and Price Controls By: Nur Baladina, SP. MP.

3.  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!

4. Buffer Stock to stabilise price: Price Quantity Bought and Sold D Target Price TP Government sets a target price (TP) S (Bad harvest) 100 50 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

6.  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

7.  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

8. Price Controls: Maximum Prices below normal equilibrium Price Quantity Bought and Sold D S £10 100 Assume the equilibrium price 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

9. 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) 170240 At the higher price, demand would fall whereas supply would rise – a surplus would exist.