Transcript ###Government Intervention in Markets

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Government Intervention in
Markets
Buffer Stocks
Income Guarantee Schemes
and Price Controls
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http://www.bized.co.uk
Buffer Stocks
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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!
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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
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Income Guarantee Schemes
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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
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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
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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
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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
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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
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