AS MicroGovernment

Intervention in Markets

Buffer Stocks – Do They Work?

How might a buffer stock help to stabilise prices in the cocoa market?

Price of Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1Q1

Excess supply at this price

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

Demand with purchases

Q1

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

Demand with purchases

Q1

Cost of buying up

stocks

The case for price stabilisation

Limitations of buffer stock schemes

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Producer burden

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? _________

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the _________________

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? _________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ZERO

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

ESupplier receives C

Consumer pays B

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

ESupplier receives C

Consumer pays B

Subsidy payment

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

Elastic demand – so a subsidy causes a large rise in quantity demanded