Evaluate the case for and against using a buffer stock scheme to stabilise the price of a commodity such as sugar or tin.
A buffer stock scheme is an intervention carried out by the government which aims to limit fluctuations in the price of a commodity. But is it the best way to stabilise the price of a commodity like sugar or tin?
Consider what would happen if there was no intervention in a commodity market, such as sugar:
In the diagram, the Supply for Year 1 is S, which gives a Price of P and Quantity of Q. This is deemed by the government to provide a price which is fair to both consumers and producers and an adequate supply of the commodity.
In Year 2 there is a bumper harvest ...view middle of the document...
However, there are a number of problems with this system. First of all, this assumes that a good harvest is followed by a bad harvest. But in reality, there could be a succession of bad harvests. In this case there would be no spare commodity stored in order to boost price and output and so the system would fail.
Storage could also be a problem: where would the extra commodity be stored? And who would pay for this? The producers, the consumers or the government? Similarly, if there were successive good harvests it may be impossible to store all of the excess.
Finally, a decision must be made about what level to set the equilibrium price at. Consumers want as low a price as possible whereas producers want a high price. This requires a value judgment to be made which cannot be agreed on by everyone.
This could be seen as undesirable for producers as the price
to A buffer stock system involves the government or local authorities buying these storage stocks and selling them back to the famer. Price stability is indicated by low inflation whereby the value of money is also stable. A buffer stock is an attempt at stabilising the prices of key commodities.
Extract C states that ‘when prices fall governments are more likely to be concerned’ this may be because more people are likely...