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Buffer Stock Scheme

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Introduction

Economics extended response Buffer Stock Scheme Lee, Grade 11 a) Buffer Stock Scheme is a system or the concept of a price support mechanism which aims at keeping price in a stable range over time. The range will be the maximum price (ceiling price) and the minimum price (floor price). Ceiling price is the limit of price which is imposed by the government on how high the price of the good should be. It can not go over the ceiling price. Floor price is the limit of price which imposed by the government on how low the price of the good should be. It can not go below that price. Both ceiling price and floor price are set above or below the equilibrium price. There are three requirements and characteristics of Buffer Stock system. a) The good should be a 'storable' good which enables the supplier to supply the goods all seasons. b) The good is often a commodity, i.e. ...read more.

Middle

The diagram is shown below. *ceteris paribus is applied here: Assuming that the demand is constant! We can see there is a contraction in the quantity demanded. The Buffer Stock Scheme is aimed to stabilize the price of goods so that the producers can make a living. But because of this intervention, there are so many parties affected, which I will discus in point b). b) The effect of intervention of the government on the agricultural goods. As it was listed before, the aim of the Buffer Stock scheme is to stabilize the price of goods to make sure that the producers can still make a living from producing the good. What it does is when the price goes above the ceiling price set, it gives out more stock (the goods are storable) into the market to reduce the price down. On the other hand, when the price goes below the floor price which has been set, the goods will be bought to decrease the amount of goods supplied ( to keep the price up). ...read more.

Conclusion

Before the subsidy is given, the model will be like this. But after the subsidy is given, the model changes to: The supply curve shifts to the right because subsidy allows the producer to produce cheaper than normal. Thus, this reduces the price down, causing imbalance. To conclude, the buffer stock scheme aims to help the producers to make a living and encourage them to participate in the market. But the negative spill over effect is that there's misallocation of scarce resources which goes AGAINST the ideology of economics: Optimally allocating scarce resources because it creates over supply. The impact on the stakeholders will be this. In the short run the producer and the government won't be aware of the negative spill over effect and continue to intervene the market, but later they will face difficulties in getting rid of the over supply and they might go bankrupt. The bad impact on the consumer will be that they have to pay all the misallocation of resources through higher tax. ...read more.

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