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Buffer stock scheme
What is it?
Buffer stock schemes seek to stabilize the market price of agricultural
products by buying up supplies of the product when harvests are
plentiful and selling stocks of the product onto the market when
supplies are low.
Notice that the price elasticity of supply for agricultural goods in
the short term is low because of the length of time it takes for
producers to supply new quantities of wheat to the market.
The government offers a guaranteed minimum price (P min) to
farmers of wheat.
If the government is to maintain the guaranteed price at P min,
then it must buy up the excess supply (Q3-Q1) and put these
purchases into intervention storage.
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Helps farmers to maintain high prices
Can secure future supply.
Farming has positive externalities it helps to sustain rural communities
Stable prices prevent excess prices for consumers helping consumer welfare
High administrative cost
The target price is often set too high due to political pressures
A guaranteed minimum price might cause over-production and rising
surpluses which has economic and environmental costs.
Economic theory suggests that subsidies can result in a misallocation
of resources.…read more