Minimum Support Price

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  • Topic: Supply and demand, Economic surplus, Economic equilibrium
  • Pages : 17 (4651 words )
  • Download(s) : 62
  • Published : December 12, 2012
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Minimum Support Prices
A Microeconomics Project

This project analyses the Minimum Support Prices (MSP) applied by Government of India. Justification for the MSP applied to wheat is also given. Finally, measures to reduce the MSP expenditure are recommended.

ACKNOWLEGEMENTS

We would like to thank our mentor Dr.Chandrima Sikdar for making herself available whenever we asked for any help and advice. Regular discussions with her molded our approach to problem solving. She showed us the importance of intuitive, clear understanding and that the quality of work is what matters in the long run. Her enthusiasm, dedication and work ethics have always been a source of inspiration for us. It has been a pleasure to work with and learn from her.

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TABLE OF CONTENTS
1 Introduction .................................................................................................... 4 1.1 1.2 1.3 1.4 2 What is a Minimum Support Price? ........................................................... 4 What is the need for MSP? ........................................................................ 4 How Government decides MSP? ............................................................... 4 List of product that receive MSP ................................................................ 5

MSP Policy of Wheat ....................................................................................... 6 2.1 2.2 Introduction............................................................................................... 6 How did MSP policy of wheat come into picture? ..................................... 6

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Justification of MSP for Wheat ....................................................................... 8 MSP Pricing of Wheat – Higher or Lower ...................................................... 10 4.1 4.2 High MSP – Increases Inflation ................................................................ 10 Low MSP – Farmer’s Income Affected ..................................................... 10

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Critical Analysis of MSP Policy ...................................................................... 12 5.1 5.2 5.3 5.4 5.5 Consumer Surplus.................................................................................... 12 Producer Surplus ..................................................................................... 12 Deadweight Loss ...................................................................................... 13 Other Effects............................................................................................ 14 Measures to minimize MSP expenditure ................................................. 16

Bibliography ........................................................................................................ 18

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1. Introduction
1.1 What is Minimum Support Price (MSP)?
Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the competitive equilibrium price for the crops. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price. Price floors/minimum prices only have an effect if they are set above the actual market clearing price. There are many instances of governments in the real world setting price floors, such as setting a national minimum wage for labour to ensure that individuals are able to earn a ‘living wage’. In addition, given the instability of agricultural prices and the need to ensure food security, farm prices may be set which guarantee a minimum price to farmers.

1.2 What is the need for MSP?
The main reason why the government fixes minimum support prices or MSPs is to ensure remunerative prices to farmers to encourage higher investment and production of agricultural commodities. Every year MSPs for major agricultural products are announced which are fixed after taking into account the recommendations of the Commission for Agricultural Costs and Prices...
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