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
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.