Olive Oil

Should Govt intervene with minimum prices for goods like olive oil.

Reasons for minimum price

  1. A minimum price guarantees a minimum income for farmers. For example, if the offer increased, prices would fall significantly.
  2. The demand for agricultural products is inelastic, so this makes the prices more volatile.
  3. 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

buffer-stock

Minimum price problems

  1. There will be a surplus, because supply is greater than demand.
  2. The government must purchase the surplus to maintain the minimum price. This is expensive and requires higher fees.
  3. 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.
  4. The government may have little information on what the price should be.

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