Olive Oil

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

Reasons for minimum price

  • A minimum price ensures a minimum income for farmers. For example, if supply increased prices would fall significantly.
  • Demand for agricultural goods is inelastic, therefore this makes prices more volatile
  • Supply can vary due to weather conditions.
  • i.e. agricultural markets are more prone to market failure than other markets.

This is a diagram for a buffer stock. This shows how a minimum price can prevent prices falling below the market equilibrium. At the target Price (effectively a min price) The government have to buy surplus of Q2 – Q1

buffer stock

Problems of Minimum Prices

  • There will be a surplus, because supply is greater than demand.
  • The government need to buy the surplus to maintain the minimum price. This is expensive and requires higher taxes.
  • A minimum price may encourage to supply more than necessary, it can lead to extensive use of chemicals to maximise the crops. Therefore, it distorts the market and encourages inefficiency.
  • Government may have poor information about what the price should be.