For this assessment, you will be required to undertake extensive research, In addition to the essay question below, you should aim to incorporate your understanding of economic concepts and theories introduced.
- Research prices for a product that interests you in a country of your choice.
- Consider various theoretical concepts p how they are applied including the impact of government/industry intervention (or lack of) has impacted on the demand/supply for that product.
- Discuss some pros and cons of government intervention with reference to your chosen product. Essay question to respond to:
- Based on your discussion, provide an opinion as to whether intervention should continue or not continue in the price discovery of your chosen product.
The government should continue to intervene in the price discovery of wheat in India.
There has been a rapid rise in the production of wheat following the record of crop in the past years which did not bring about a fall in the prices of wheat. This trend is attributed to the policies that were put across by the government. Any review of the rates should be done after understanding the underlying objectives which for this case are found in the Agricultural price commission in India. The APC advises the government on the pricing policies by following a strategic pricing structure for the various agricultural products which are in the general perspective of the economy and also referring to the interest of both the consumer and the producer. The agency keeps its view on the incentives of the producer and even the need to ensure that there is a rational use of land as this has a high probability of affecting the rest of the economy.
Theoretically, as well as practically, the price structure supports the minimum rate of the procurement price and also the market price. Some researchers add the statutory market price but is of no importance due to the existence of the black market which is universally acknowledged. Conceptual framework of this structure of price is easily understood in that, the minimum support price should cover the costs plus the normal profits and therefore it is supposed to be a guaranteed price to the farmers at given times when there is a fall in the market prices or even when the market prices show signs of falling. The procurement price is supposed to be below the market price but should be above the support level and therefore this kind of a price should be regarded as a kind of a tax. There could be no disputes with this kind of a scheme given that one of the primary objectives is the reduction in prices but not the reordering of the three approaches to pricing (Banerji & Meenakshi, 2015, p. 153).
Given that for example, the goal is to hike the prices to the maximum possible price, there is then no need. A price floor is a price that is set at the base. For the procurement price to be below the market price and the support price level is needed not to play any role even in the good years. Both the market price and the procurement price can be allowed to stay close forever (Srinivasan & Jha, 2014, p. 253).
The structure of prices
However, in the last two years, the price s of wheat have fallen below the support level of Rs 1735. The prices started going down due to the arrival of new crops from Pradesh and Gujarat among other places. Early crops were damaged as a result of late-season and hailstorms and the farmers had started their transactions in the market instead of waiting for the procurement (Jha , et al., 2013, p. 76).
The quality of wheat that comes from MP is better than the one that comes from India. Due to the latter, the government announced a bonus of Rs 265 per every quintal that is above the MSP.
The intervention of the government is primarily meant to keep the prices at equilibrium. The government has intervened through the following techniques, and the effects of its intervention are discussed here (Chand, 2013, p. 147).
The government of India intervenes in the setting of price floors for wheat in the agricultural markets. A price floor is the minimum allowable price that is set by the government and it is set slightly above the equilibrium price with the existence of a price floor, the government can forbid any price below the set minimum price. When the government sets the price floor above the equilibrium, then there is the creation of the surpluses.
In the diagram below, suppose the government sets the price for what at Pf, then the buyers will be willing and also able to buy W1 bushels .on the other hand, the sellers will offer W2bushels of wheat at a price floor Pf. There will hence be a surplus of wheat and all this will be indicted by W2-W1.there will be persistence in the excess since the government does not want the price to fall below the price it set (Jha & Srinivasan, 2015, p. 89). (Srinivasan & Jha, 2014, p. 85).
Farming has changed dramatically, and hence there is a need to set prices to avoid customer exploitation among other reasons. There has been an improvement in technology, and this has improved the worldwide agricultural production capacity. The increased production can easily lead to low prices in the market. The effect of this is that farmers have kept lobbying from the government to maintain such prices at a level that they do not fall unexpectedly (Balakrishnan, 2013, p. 58).
The aim of this is to make the rental units relatively cheaper for the farmers. The purpose of rent control in India for the farmers is to help keep pace with price increase in the other sectors of the economy. Rent control is an example of a price ceiling strategy whereby the there is a maximum price set for some commodity and whereby those who have the merchandise should not exceed that price. A price ceiling that is set below the equilibrium price will automatically create a shortage, and this will persist until the government intervenes.
Setting price floors
Due to the improvement in the level of technology, there has been increased production of wheat in India. Technology has made farmers adopt new techniques of production and hence increased production (Jha , et al., 2013, p. 93). The farmers, in turn, enter the market and supply their goods in excess form. Due to increased supply, the price of wheat goes down, and hence the farmers can be easily exploited by selling their farm produce at a meagre amount. With the aim of protecting the farmers, the government will then intervene in the market. The importance of government intervention is that it sets rates at a floor such that no amount of wheat will be sold below a given minimum price. This creates room for farmers to gain some profits instead of selling their produce at a loss (Banerji & Meenakshi, 2015, p. 59).
The government can also intervene in the residential area where farmers stay and set a ceiling price for the homeowners. The ceiling price is set to make sure that the farmers are not exploited in that they would be paying rent up to a certain amount above which it will not be legal for the homeowners to charge. The importance of government intervention here is to make sure that farmers are not exploited by the homeowners when they are paying their rent (Jha & Srinivasan, 2015, p. 143).
As discussed above, the intervention of the government to control the prices of wheat in India is a very important move and hence the government should keep intervening. Government intervention has made farmers not to be exploited in the modern market through the setting of the floor prices. The government intervention through the configuration of the price ceiling has also made it possible for the homeowners not to charge too much rent to the farmers. Government intervention is, therefore, an important factor as far as balancing the forces of demand and supply is concerned (Banerji & Meenakshi, 2015, p. 158). In absence of the intervention of the government in Indian wheat supply, the farmers could supply excess and therefore the prices go down making the farmers sell wheat at a loss. When the government sets in, the price floors are set hence making it easy for the farmers to sell wheat at a profit. Government intervention through the ceiling is also an important factor. Without the intervention of the government, the homeowners can set rent at a very high price so that very few farmers will afford decent housing (Jha & Srinivasan, 2015, p. 68).Government intervention is disadvantageous to the homeowners since it makes them not maximise their opportunities through the hiking of prices.
Farming has been one of the oldest sectors anywhere across the globe. Many families depend on farm output for their survival. Wheat Farming in India is an excellent example of agricultural production that supports most people in this particular country. However, due to the improvement in technology, there has been a tendency of the farmers selling their wheat at prices that are very low to sustain their daily need.to counter this, the government intervenes in the market to make sure that the farmers are not exploited in any way. The government has also been able to set price ceilings to make sure that the homeowners do not exploit the farmers. It is hence important to note that the intervention of government in the market is a good move.
Balakrishnan, P., 2013. Agriculture and economic reforms: Growth and welfare. Economic and Political Weekly, 17(4), pp. 99-123.
Banerji , A. & Meenakshi, J. V., 2015. Buyer collusion and efficiency of government intervention in wheat markets in northern India: An asymmetric structural auctions analysis. American journal of agricultural economics, 16(3), pp. 143-168.
Chand, R., 2013. Government intervention in foodgrain markets in the new context. Kolkata: s.n.
Jha , S., Shikha , P. V., Srinivasan , F. & Maurice , R., 2013. "Indian wheat and rice sector policies and the implications of reform." (2007).. Mumbai: s.n.
Jha , S. & Srinivasan, P. V., 2015. Grain price stabilization in India: Evaluation of policy alternatives. Agricultural Economics, 23(2), pp. 78-98.
Srinivasan, P. V. & Jha, S., 2014. Liberalized trade and domestic price stability. The case of rice and wheat in India. Journal of Development Economics, 34(5), pp. 243-245.
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