Evaluate the case for and against using a buffer stock scheme to stabilise the price of a commodity such as sugar or tin.
A buffer stock scheme is an intervention carried out by the government which aims to limit fluctuations in the price of a commodity. It involves the
government and/or local authorities buying these
storage stocks and selling them back to the famer. Price
stability is indicated by low inflation whereby the value of money is also stable. A buffer stock is an attempt at stabilising the prices of key commodities.
Extract C states that ‘when prices fall governments are more likely to be concerned’ this may be because more people are likely to buy them so the government is more likely to have to buy more from the farmer. The free market usually determine the prices of commodities such as sugar and tin, yet, without intervention, the prices of coffee and sugar have been unstable as Extract A shows a significant increase in the price of coffee in 2008 and sugar in 2005. Should there be a large rise in supply due to better than expected yields at harvest time, the market supply will shift out – putting downward pressure on the free market equilibrium price. In this situation, the intervention agency will have to intervene in the market and buy up the surplus stock to prevent the price from falling. It is easy to see how if the market supply rises faster than demand then the amount of wheat bought into storage will grow. The stable prices help maintain farmers’ incomes and improve the incentive to grow legal crops; this stability enables capital investment in agriculture needed to lift agricultural productivity, as farming has positive externalities it helps to sustain rural communities. The stable prices prevent excess prices for consumers – helping consumer welfare. However, a minimum price legislation may be applicable as it not only protects the producer, the farmer in this case but it ensures he receives some revenue for his...
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