2.11 Government Intervention (BUFFER STOCK SYSTEMS) Flashcards
(19 cards)
what is a buffer stock system
occurs when the governement store agricultural products and cimmodites in order to maintain stable prices in a market.
What goods are buffer stock systems usually used for?
in agricultural markets where supply can be severely affected by weather conditions
Commodities such as wheat, rice, coffee, oil, or dairy — where supply and demand are price inelastic and subject to shocks.
What is the main aim of a buffer stock scheme?
To reduce price volatility in commodity markets and stabilise farmer incomes.
How does a buffer stock system work when prices are low?
The government buys and stores the surplus to raise the market price and support producers
How does a buffer stock system work when prices are high?
The government releases stock into the market to increase supply and bring prices down for consumers.
What is a real-world example of a buffer stock system?
The EU Common Agricultural Policy (CAP) previously used buffer stocks to stabilise agricultural prices across member states.
When might buffer stock schemes fail?
If prices fall too low and the agency runs out of funds
If stored goods deteriorate or become obsolete
If it’s hard to set a suitable price floor and ceiling
draw a graph to show buffer stock systems
One demand line- demand is constant
Price stays the same- draw a dashed line going all the way across
S- original supply
S1- decrease in supply (poor harvest/bad production levels). leads to Q1, decreases in quantity
S2- increase in supply (good harvest/good production levels). leads to Q2, increases in quantity
the government keep stock in reserve in order to maintain market equilibrium and guarantee farmers a minimum price for their produce
the government set a target price of P where output is Q. If there is a decrease in supply e.g due to poor harvest, the supply curve will shift to S1. The government will release some of its buffer stock and increase supply back to its original equilibrium at PQ.
If there is a bumper harvest supply will increase to S2. the government will buy up stock in order to increase prices.
what are the advantages of buffer stocks
Reduces price volatility
Commodity markets often face sharp price swings due to inelastic supply and demand. Buffer stocks help smooth out these fluctuations, creating a more stable market.
Stabilises producer incomes
Farmers and producers benefit from predictable prices, which helps them plan investment and production decisions more effectively — this is especially important in developing countries.
Promotes food security
By releasing stock during shortages or crises, buffer stock schemes help ensure the availability of essential goods (e.g. grain), especially during supply shocks.
Supports rural economies
Stable commodity prices support agricultural regions where farming is a major source of income, reducing poverty and rural-urban migration.
Encourages long-term investment
Stable prices may encourage producers to invest in better technology and more efficient methods, promoting productivity and sustainability.
Counter-cyclical demand management
In recessions, buying up surplus stock supports demand; in booms, releasing stock cools inflation — acting as an automatic stabiliser.
what are the disadvantages of buffer stocks
High cost to government
Buying surplus stock and maintaining storage facilities is expensive, and long-term schemes require significant public funding and budget commitments.
Risk of stock wastage
Perishable goods (e.g. dairy, fresh produce) can spoil if not used in time. Even non-perishable goods may degrade, lose value, or become outdated.
Moral hazard (overproduction)
If producers are guaranteed a minimum price, they may overproduce, relying on the government to buy the excess — leading to inefficiency and waste.
Market distortion
Interfering with the price mechanism can reduce allocative efficiency and delay necessary structural changes in the economy (e.g. diversification away from inefficient crops).
Difficult to set the right price range
Setting floor/ceiling prices too high or too low can make the scheme ineffective — e.g., prices may not fall low enough for the government to buy, or may exceed the ceiling too often.
Opportunity cost
Funds used to run a buffer stock scheme could be spent elsewhere — e.g., education, healthcare, or infrastructure — potentially delivering greater social benefit.
Storage and logistics challenges
Physical storage (warehouses, transport, preservation) can be complex and vulnerable to mismanagement or corruption, especially in less developed economies.
what other intervention could be used instead
minimum prices
subsidies
What is Maslow’s Hierarchy of Needs?
A psychological theory ranking human needs from basic survival (physiological) to personal fulfilment (self-actualisation) in five levels.
What is the lowest level of Maslow’s hierarchy?
Physiological needs — food, water, shelter — essential for survival.
How do buffer stock systems support physiological needs?
They help ensure access to food by keeping prices stable and supply secure, especially during shortages or crises.
What is the second level of Maslow’s hierarchy?
Safety needs — personal and financial security, health, and stability.
How do buffer stock systems support safety needs?
They create income stability for farmers and protect consumers from sudden price spikes, reducing economic uncertainty.
What is an example of buffer stocks supporting basic needs?
In India, buffer stocks of food grains help feed poor households through rationing systems during poor harvests.
Can buffer stock systems support higher levels of Maslow’s hierarchy?
Indirectly, yes — by meeting basic and safety needs, they allow people to pursue education, self-esteem, and personal goals.
How can this be used in economic evaluation?
Buffer stocks don’t just stabilise markets — they improve human well-being, support development, and reduce poverty, especially in developing countries.
