Should Govt intervene with minimum prices for goods like olive oil.
Reasons for minimum price
- A minimum price guarantees a minimum income for farmers. For example, if the offer increased, prices would fall significantly.
- The demand for agricultural products is inelastic, so this makes the prices more volatile.
- The supply may vary due to weather conditions.
that is, agricultural markets are more prone to market failures than other markets.
This is a diagram for a buffer stock. This shows how a minimum price can prevent prices from falling below market equilibrium. At the target price (actually a minimum price) The government must buy a surplus of Q2 – Q1
Minimum price problems
- There will be a surplus, because supply is greater than demand.
- The government must purchase the surplus to maintain the minimum price. This is expensive and requires higher fees.
- A minimum price can encourage you to supply more than necessary, it can lead to extensive use of chemicals to maximize crops. Therefore, it distorts the market and encourages inefficiency.
- The government may have little information on what the price should be.