Buffer stocks and stabilization funds - stabilize farm price, Managerial Economics

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Buffer stocks and stabilization funds

In this case the government buys up part of the supply when output is excessive, stores this surplus, and resells it to consumers in times of shortage or reduced supply. The amounts that the government must buy or sell to stabilize incomes will therefore depend on the elasticity of demand.

In practice this normally operates through a marketing board controlling the industry, with monopoly powers to fix prices to producers. The Board will usually guarantee a minimum price for the commodity and may make an initial payment to the grower followed by an additional payment if sales by the Board subsequently realize a price in excess of the minimum. Producers of the crop are thus encouraged by the knowledge that any decrease in price during the season will be moderated by Government action.

In the stabilization Funds, the Government fix the price. When the demand is high, the government shall retain the difference, and subsidize the price to producers when demand is low.


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