Government Interventions in Market Economics

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Questions and Answers

Match the following tax types with their descriptions:

Ad valorem tax = A percentage of the price charged by the retailer Specific tax = A fixed amount per unit purchased Indirect tax = A tax imposed on producers but often passed to consumers VAT = A typical example of an ad valorem tax

Match the following concepts with their effects on the market:

Specific tax imposition = Results in a leftward shift of the supply curve Market price increase due to specific tax = Moves from P to P₁ Quantity traded with specific tax = Decreases from Q to Q₁ Producer payments from government = Results in a rightward shift of the supply curve

Match the following terms with their primary application:

Subsidies = Direct payments from governments to producers Specific taxes = Measures tax by a measurable quantity (e.g per litre) Indirect taxes = Used to discourage consumption of demerit goods Ad valorem taxes = Tax paid on a percentage of the sale price.

Match the following government interventions with their purposes:

<p>Subsidies aim = To keep down prices of essential goods Indirect taxes purpose = To discourage production of demerit goods Subsidies effect = Acts as a fall in costs for producers Taxes effect on supply = Acts as a cost increase for producers</p> Signup and view all the answers

Match the examples with the correct type of tax:

<p>Fuel tax = Specific tax GST in Canada = Ad valorem tax VAT in Kenya = Ad valorem tax Taxes on cigarettes = Indirect tax</p> Signup and view all the answers

Match the economic principles with their corresponding descriptions:

<p>Market equilibrium = The point where quantity supplied equals quantity demanded Supply curve shift = Reflects changes in production costs due to taxes or subsidies Price increase impact = May decrease the quantity traded Subsidies impact on price = May decrease market prices</p> Signup and view all the answers

Match the policy actions with the relevant outcomes:

<p>Subsidies to farmers = May raise farmers' income Subsidies to domestic producers = May reduce import dependence Increase in specific tax on fuel = Will increase the prices for consumers buying fuel Taxes on high sugar drinks = To discourage consumption</p> Signup and view all the answers

Match the consequences with the appropriate market interventions:

<p>Increased market prices = Result from taxes on production Rightward shift of supply curve = Results from government subsidies Reduced consumption of demerit good = Result from indirect tax imposition Increased sales for exporters = Can result from exporter subsidies</p> Signup and view all the answers

Match the following government interventions with their likely effect on the market:

<p>Maximum price below equilibrium = Shortage of the product Maximum price above equilibrium = No effect on market equilibrium Direct provision of goods with no charge = Potential overprovision and inefficiency Rationing = Informal or underground markets</p> Signup and view all the answers

Match the following reasons with the purposes of government price intervention:

<p>Helping low income families = Reducing inequalities in income Recognizing wider benefits of consumption = Subsidizing socially desirable products Addressing market failure = Attempting to correct resource misallocation Ensuring essential goods are affordable = Imposing maximum prices on staple items</p> Signup and view all the answers

Match the following terms with their descriptions related to price controls:

<p>Price Ceiling = Maximum legal price Equilibrium Price = Price where supply equals demand Shortage = Excess demand over supply at a given price Underground Market = Informal market that bypasses price controls</p> Signup and view all the answers

Match the following government interventions with their intended outcomes:

<p>Maximum price on staple food = Increased affordability for consumers Maximum price on petrol = Reduced cost of transportation Maximum rent controls = More affordable housing options Subsidized transport fares = Increased access to public transport</p> Signup and view all the answers

Match the following concepts with their economic consequences in a market with maximum price controls:

<p>Queuing = Non-price way to allocate limited supply Reduced producer supply = Lower quantity of goods available Increase in demand = Higher quantity of goods desired Increased consumer welfare = Some individuals benefit due to lower prices</p> Signup and view all the answers

Match the following examples with the type of goods or services subjected to maximum price control:

<p>Cooking oil = Staple food items Diesel fuel = Essential fuel Rents = Housing Water = Utility services</p> Signup and view all the answers

Match the following actions to the problems they are meant to address:

<p>Imposing maximum price = Addresses issues of affordability and equity Government provision of goods = Compensates for market under-provision Rationing of goods = Controls distribution when supply is short Establishing maximum price below the equilibrium price = Leads to a shortage of the product</p> Signup and view all the answers

Match the following economic terms related to market intervention with their descriptions:

<p>Maximum Price = Price that cannot be legally exceeded Equilibrium = The point where supply and demand intersect Shortage = When demand is greater than supply Informal Market = A market operating outside legal regulations and price controls</p> Signup and view all the answers

Match the government interventions with their effects on the supply curve:

<p>Subsidy payment = Shifts the supply curve to the right Reduction in subsidy payment = Shifts the supply curve to the left Direct provision of goods = Does not directly affect the supply curve Imposition of tax on production = Shifts the supply curve to the left</p> Signup and view all the answers

Match the concepts with their descriptions:

<p>Merit goods = Goods like healthcare and education provided free or partially free due to equity considerations. Public goods = Goods that are non-excludable and non-rivalrous, provided by the government. Market Failure = A situation where the price of a good is too high in the free market. Direct Provision = Government provides goods or services financed by the tax system.</p> Signup and view all the answers

Match the healthcare provision models with their descriptions:

<p>UK National Health Service = Provides free healthcare to all citizens through tax funding. USA Healthcare system = Limited free health care, requires most to buy medical insurance or pay out of pocket. Low-income countries = Healthcare usually charged to the patient, basic healthcare is freely available. Cuban Healthcare System = Notable low-income country that provides free healthcare to citizens.</p> Signup and view all the answers

Match the economic effects with their typical results:

<p>Introduction of a subsidy = Leads to a fall in price and increase in quantity traded Maximum pricing intervention = Generally results in demand surplus or shortage Direct government provision = Can lead to higher costs than in a competitive market Free market outcome = May result in excessive pricing or lack of equity</p> Signup and view all the answers

Match the concepts with rationale for government intervention:

<p>Merit Goods = Ensure access to healthcare and education regardless of income. Public Goods = Must be provided by the government due to market failure. Maximum price = Addresses excessively high market prices, creating more affordable access Subsidies = Decrease producer costs and increase overall output</p> Signup and view all the answers

Match the government action to the impacted group

<p>Subsidy Payment = Benefits producers Reduced subsidy payments = Reduces producer revenues Direct provision of services = Benefits consumers Maximum Price Control = Benefits consumers, may harm producers</p> Signup and view all the answers

Match the concept to the market failure addressed

<p>Merit goods = Underconsumption due to underestimation of benefits Public goods = Non-provision due to non-excludability and non-rivalry Maximum prices = Excessively high prices that can exclude consumers Subsidies = Under-production due to excess cost of production</p> Signup and view all the answers

Match the actions taken on the market with expected results

<p>Subsidy = Lower price for consumers and greater total quantity supplied Maximum Price = Can create shortage and black market formation Direct Provision = Universal access for all citizens Free Market = May cause market inefficiencies</p> Signup and view all the answers

Match the following terms with their descriptions related to buffer stock schemes:

<p>Minimum price = Price floor set by the scheme, below which price cannot fall Maximum price = Price ceiling set by the scheme, above which price cannot rise Buying stocks = Action taken when market price is too low to raise the price Selling stocks = Action taken when market price is too high to lower the price</p> Signup and view all the answers

Match the following concepts with their respective government intervention strategies:

<p>Merit goods underconsumption = Government provided information to increase consumption Demerit goods overconsumption = Government provided information to decrease consumption Information failure = Situation where consumers lack information needed Information provision = Government supplies information to influence behavior</p> Signup and view all the answers

Match the following actions with their intended effects within a buffer stock scheme:

<p>Buying potatoes = Increases the market price of potatoes Selling potatoes = Decreases the market price of potatoes High minimum prices = Protects high-cost producers from competition Informal market = Trading of goods outside of regulated channels</p> Signup and view all the answers

Match the following informational measures with their respective areas of focus:

<p>Cigarette warnings = Public health risks of smoking Health campaigns = Public awareness of health issues Non-prescription medicine advice = Responsible use of over-the-counter drugs Food packaging labels = Nutritional content and allergy information</p> Signup and view all the answers

Match the following economic terms to their described characteristics:

<p>Price volatility = Unpredictable fluctuations in market prices Buffer stock scheme = Mechanism to smooth out price fluctuations Common Agricultural Policy (CAP) = Example of a practical implementation of buffer scheme by EU Structural reforms = Changes to increase efficiency in agriculture production</p> Signup and view all the answers

Match the following concepts to their economic trade offs or potential failures:

<p>Minimum price controls = May result in inefficient overproduction Maximum price controls = May result in shortages and black markets High indirect taxation = Incentive for smuggling and informal markets Inefficient producers = Little incentive to reduce costs in protected markets</p> Signup and view all the answers

Match the following examples of information provision with their purposes:

<p>Warning labels on cigarettes = Discourage consumption of a demerit good Public health campaigns = Promote awareness of health-related issues Advice on non-prescription medicines = Encourage safe and effective usage Nutrition labels on food = Allow consumers to make informed decisions about food</p> Signup and view all the answers

Match the following actions and their potential results:

<p>Government buys surplus = Price increase Government sells surplus = Price decrease High minimum price for goods = Black markets development Informative measures = Behavioral change through awareness</p> Signup and view all the answers

Match the economic issues with their corresponding descriptions:

<p>Lack of Formal Employment = Decreased job opportunities, especially for younger individuals and skilled professionals. Poor Vocational Training = Local industries can not maintain their operations due to insufficient skilled labor. Low Savings Rate = This factor limits the availability of funds for both private and public investment Poor Infrastructure = Hindrance to economic development due to lack of transportation, power, and water.</p> Signup and view all the answers

Match the reasons for market failure with their descriptions:

<p>Inefficient Production = Markets operate imperfectly, leading to suboptimal resource use. Imperfect Information = Consumers lack the full facts to make the best decisions. Price Mechanism Failure = Market forces fail to account for all costs and benefits. Inefficient Resource Allocation = Markets do not distribute goods and services effectively.</p> Signup and view all the answers

Match policy challenges with their descriptions:

<p>Tax Evasion = Deliberate avoidance of tax payments, undermining government revenue. Corruption = Illicit activities disrupt the implementation and regulation of government policies. Large Informal Economy = A big portion of economic activities happens outside of formal systems, evading taxes. Difficulty of Tax Collection = Low- and middle-income countries face challenges in gathering adequate tax revenues.</p> Signup and view all the answers

Match government actions with their purposes:

<p>Tax Collection = Raise funds for government spending and regulation. Policies to Redistribute Income = Aims to decrease the gap between high- and low-income earners. Regulation = Implement and enforce policies to ensure the system functions correctly Policies to Redistribute Wealth = Aims to transfer assets or resources to create a more equitable distribution.</p> Signup and view all the answers

Match the economic concepts with their related issues:

<p>Human Capital = Reduced ability of an economy to grow due to lack of investment in education and health. Market Mechanism = When the markets use prices to allocate resources efficiently, this doesn't always occur. Government Intervention = An attempt to fix market failures. Economic Growth = Can get held back by poor vocational training and lack of human capital</p> Signup and view all the answers

Match the concept with its result:

<p>Lack of credit access = Inability to fund small businesses and education Tax evasion = Hindered ability of the government to implement policy Market failure = Suboptimal allocation of resources Efficient market = Optimal allocation of resources</p> Signup and view all the answers

Match the type of tax with a description:

<p>Direct taxes = Taxes paid directly to the government by an individual or organization Indirect taxes = Taxes collected by an intermediary from an individual or organization Income tax = A tax on earnings Property tax = A tax on the ownership of assets</p> Signup and view all the answers

Match policy tools with their specific description:

<p>Fiscal policy = Government decisions related to taxation and spending or borrowing Monetary policy = Central bank decisions related to money and credit supply Regulation = Government setting rules and procedures within markets Subsidies = Government payment to private firms or households</p> Signup and view all the answers

Match the following market failures with their descriptions:

<p>Lack of public goods = Goods not provided by the market due to free-rider problem Underproduction of merit goods = Goods beneficial to society not produced enough in the market Overconsumption of demerit goods = Harmful goods over consumed due to lack of information Information failure = Consumers lack full understanding about products</p> Signup and view all the answers

Match the following public goods with their characteristic:

<p>National defence = Consumed collectively by everyone Street lights = Use by one person does not make it less available to others Lighthouse = Difficult to make a direct charge for consuming Non-toll Roads = Funded by the government and free of charge</p> Signup and view all the answers

Match the following aspects of demerit goods with their descriptions:

<p>Undesirable for consumers = Goods considered harmful to the consumer Over provided = Market produces too much of these goods Lack of full information = Consumers often don't know enough about the harm Over consumed = Individuals use too many of these goods</p> Signup and view all the answers

Match the following government interventions with the market failure they address:

<p>Funding public goods via taxes = Lack of public goods Regulations on smoking = Overconsumption of demerit goods Warnings on packaging = Information failure regarding demerit goods Provision of public goods for free = Free Rider Problem</p> Signup and view all the answers

Match the following government objectives with their actions:

<p>Promote a productive workforce = Measures to reduce smoking Reduce healthcare costs = Discouraging consumption of demerit goods Protect health and well-being = Warnings and regulations regarding demerit goods Fund road access = Taxes to pay for infrastructure</p> Signup and view all the answers

Match the characteristic of the good with the example:

<p>Consumed collectively = Police force Difficult to charge for = Lighthouse Tend to be over consumed = Cigarettes Funded out of tax revenue = National Defence</p> Signup and view all the answers

Match the concept with a consequence

<p>Free rider problem = Public goods not provided by the free market Information failure = Over consumption of demerit goods Opportunity cost = Funding for public goods competes with other spending Public goods = Funded by tax revenue</p> Signup and view all the answers

Match the action with the purpose

<p>Banning smoking in public places = Protecting the health of the population Mandating warnings on product packaging = Addressing information failure Providing police services = Addressing lack of public goods Investing in street lighting = Provide goods that benefit everyone</p> Signup and view all the answers

Flashcards

Subsidy

A government payment to producers for each unit of a good produced, shifting the supply curve to the right and lowering the price.

Effect of Subsidy on Market

A government payment to producers for each unit of a good produced, resulting in a lower price and higher quantity traded.

Specific Tax

A tax that is a fixed amount per unit of a good traded. For example, a fixed amount per litre of gasoline.

Direct Provision of Goods and Services

Goods provided free of charge at the point of use, financed through taxes.

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Merit Goods

Goods considered essential, like healthcare and education, that can be provided partially or fully free.

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Ad Valorem Tax

A tax that is a percentage of the price of a good. For example, Value Added Tax (VAT) is typically calculated as a percentage of the retail price.

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Public Goods

Goods that are non-excludable and non-rivalrous, meaning they are available to everyone and one person's consumption doesn't reduce another's.

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Incidence of a Tax

The effect of a tax on the final price paid by consumers or the revenue received by producers. It measures how the tax burden is distributed between buyers and sellers.

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Market Failure due to High Price

A situation where the market price of a good is too high, potentially leading to market failure.

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Maximum Price

Setting a maximum price for a good that is lower than the equilibrium price, resulting in a shortage.

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Impact of a Tax/Subsidy

The change in the market equilibrium due to a tax or subsidy. It includes changes to the price and quantity traded in the market.

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Minimum Price

Setting a minimum price for a good that is higher than the equilibrium price, resulting in a surplus.

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Demerit Goods

Goods that are considered harmful to individuals and society, such as cigarettes and alcohol. Governments often use indirect taxes to discourage their consumption.

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Merit Goods

Goods that are considered beneficial to individuals and society, such as education and healthcare. Governments might use subsidies to encourage their consumption.

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Government Intervention

A situation where the government intervenes in the market to achieve specific economic or social goals. This can involve measures like taxation, subsidies, and regulations.

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Maximum Price Control

A government-imposed limit on the price of a good or service, set below the equilibrium price in a free market.

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Shortage

The situation where the quantity demanded of a good exceeds the quantity supplied at a given price, typically due to price controls.

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Queuing

When consumers have to wait in line to purchase goods, often due to limited supply.

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Rationing

The practice of limiting the amount of a good or service that each person can buy, often implemented during shortages.

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Underground Market

A hidden or informal market where goods are sold at prices above government-imposed maximum prices.

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Free Market

The allocation of resources based on the forces of supply and demand, where prices are determined freely without government intervention.

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Market Overprovision

The tendency for the market to produce more of a good or service than is socially desirable, often due to externalities or lack of pricing mechanisms.

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Market Failure

A situation where markets do not allocate resources efficiently, leading to an imbalance between costs and benefits.

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Price Mechanism Failing

When the price mechanism doesn't consider all relevant costs and benefits of producing or consuming a product.

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Lack of Skilled Labor

An economic situation where a shortage of skilled workers exists due to insufficient vocational training.

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Human Capital Gap

Insufficient investment in education and healthcare leads to less developed human capital, which hinders economic growth.

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Inadequate Infrastructure

A situation where inadequate infrastructure, like roads and power supplies, hinders economic activity and development.

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Low Savings Rate

When a country's population doesn't save enough money, it can limit investment opportunities and hinder economic growth.

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Limited Credit Access

Limited access to credit restricts individuals and small businesses from funding crucial investments.

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Income and Wealth Inequality

The unequal distribution of income and assets within a society.

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Buffer Stock Scheme

A policy that aims to stabilize the price of agricultural products by buying and selling stocks based on market conditions.

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Information Provision

The act of providing information to consumers to make informed decisions about their consumption choices. This can be done through various means such as public campaigns, labeling requirements, and educational programs.

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Information Failure

The situation where consumers lack complete information about a product or service, leading to potentially inefficient decisions. This can happen when the benefits or risks associated with a good are not fully understood.

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Free Rider Problem

The problem where individuals benefit from public goods without contributing to their cost, making it difficult to fund them privately. This is because it's hard to exclude people from enjoyment, even if they don't pay.

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Government Intervention in Markets

The actions a government takes to influence market outcomes and address market failures, such as providing public goods, regulating demerit goods, or subsidizing merit goods.

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Discouraging Consumption of Demerit Goods

Using taxes or regulations to discourage the consumption of demerit goods. This can include hefty taxes on cigarettes, alcohol, or sugary drinks.

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Study Notes

Subsidies

  • Subsidies are direct payments made by governments to producers of goods and services.

  • Reasons for providing subsidies include:

    • Keeping down prices of essential goods
    • Encouraging greater consumption of merit goods
    • Contributing to more equitable income distribution
    • Providing services not offered by the free market
    • Increasing producer income (especially for farmers)
    • Increasing exports
    • Reducing dependence on imports

  • Subsidies result in a rightward shift in the market supply curve. This is because they lower production costs for producers.

  • A reduction in subsidy payments will shift the supply curve to the left.

  • Introducing a subsidy causes a fall in price (from P to P₁) and an increase in quantity traded (from Q to Q₁). This is the typical market effect when the government pays money to producers.

The Impact and Incidence of Specific Indirect Taxes

  • Indirect taxes are either ad valorem or specific.
  • Ad valorem taxes are a percentage of the price charged by the retailer (e.g., VAT, GST).
  • Specific taxes are a fixed amount per unit purchased (e.g., fuel tax).
  • Indirect taxes are used to discourage demerit goods (e.g., cigarettes, high-sugar drinks).
  • When an indirect tax is applied, the supply curve shifts to the left by the amount of tax.
  • The incidence of an indirect tax depends on the price elasticity of demand for the product.

Controlling Prices in Markets

  • Governments set maximum prices to prevent sellers from charging above a certain level.
  • Maximum prices are effective below the equilibrium price.
  • An example is controlling rent prices to make housing more affordable.
  • Another example is the controlling prices of basic food items like bread.
  • Governments may set minimum prices to protect farmers from low prices.
  • Minimum prices are set above the equilibrium price.
  • An example of a minimum price is for agricultural products such as wheat and rice.

State Provision of Essential Goods and Services

  • Governments might provide certain essential goods and services free or at a low cost.
  • The justification for this provision is usually based on equity considerations.
  • Free provision is often offered for healthcare and/or education.
  • This funding typically comes from tax revenue.

Progressive Income Taxes, Inheritance and Capital Taxes

  • Progressive income tax systems tax higher earners at higher rates than lower earners.
  • Inheritance tax is levied on wealth received from deceased individuals.
  • Capital taxes are levied on the financial gain from owning assets like property or financial portfolios.
  • These measures are used to reduce income and wealth inequalities.

Transfer Payments

  • Transfer payments are payments made out of tax revenues to specific groups.
  • These are not made through the free market.
  • Examples include old-age pensions, unemployment benefits, and child benefits.
  • The funding for these payments varies depending on the country and government.

Market Failure

  • Market failure occurs when the free market mechanism does not efficiently allocate resources.
  • Types of market failure include: lack of public goods, underproduction of merit goods, overconsumption of demerit goods, information failure, and others.

Minimum Wages

  • A minimum wage is a legally mandated minimum hourly wage.
  • Minimum wage policies can result in unemployment because employers are less likely to hire workers if wages are above equilibrium.
  • Supporters of minimum wages say they reduce poverty and provide social mobility.
  • Critics argue it creates unemployment and is ineffective if it's poorly enforced in specific countries.

Policies to Redistribute Income and Wealth

  • Governments use policies to reduce income and wealth inequality.
  • Taxes and transfer payments are two main policy tools.
  • The methods and success of these policies depend on the specific circumstance of each country.

Measuring Income and Wealth Inequality

  • The Gini coefficient measures income inequality.
  • A coefficient of 0 represents perfect equality while a coefficient approaching 1 represents perfect inequality.
  • This is often used in economic assessments to assess income distribution across various countries and populations.

Information Provision By Government

  • Governments sometimes intervene by providing information to consumers to correct information failures.
  • For example, mandatory warnings on cigarette packs, public service announcements, nutritional information, and health warnings.

Buffer Stock Schemes

  • Buffer stock schemes are used to stabilize agricultural commodity prices by regulating supply.
  • When prices fall below the minimum, the government purchases to increase supply and raise prices.
  • When minimum prices are exceeded, the government releases existing stocks to decrease supply and decrease prices.
  • An example is the European Union's Common Agricultural Policy.

Minimum Price

  • Minimum prices are set above the equilibrium price to protect producers.
  • This can result in an excess supply and an informal market.
  • Producers with high costs might be unable to compete with lower-cost counterparts and result in inefficiencies.
  • Examples are in agriculture and some skilled markets.

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