The article states that
farmers have been burning heaps of their chilli crops and upset at the
depression in prices that have followed massive overproduction as they were
hoping for good returns this year, as prices of chilli crops have hit Rs 12,000
per quintal last year but the prices crashed by 50% and are still between Rs
5,000 and Rs 6,000 per quintal this year.

This serves as an example
to illustrate the need of government intervention to protect the farmers, the
government can adopt price floor as a solution for this consequence. A legally
set minimum price is called price floor. Price floors are generally used for
two reasons: to provide income support for farmers and to protect low-skilled
and low wage workers by offering them prices for their products that are above
market determined prices by controlling the price in product markets and
provide them with minimum wage that is above the level determined in the market
by controlling price in resource market. One method governments use to support
farmers incomes is to set price floors for definite agricultural products, the
aim being to raise the price above their equilibrium market price, this method
is called PRICE SUPPORTS. This results in reallocation of resources. The
government takes initiative to provide financial support of Rs 1,500 for every
quintal over and above the price that the farmer gets and has capped the
support at 20 quintals per farmer. The imposition of price floor reduces the loss
to farmers.

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 figure 1: change in supply for chilli crops
during different years.

 

 

  P signifies the price and Q signifies the
quantity.  Initially, the supply was P1
per quintal, this is when D intersects S1. Due to an increase in supply, there
is a shift in supply curve to S2 that is, from point a to b, this creates
disequilibrium as there is excess supply. Therefore, price begins to fall and
there results a movement down S2 to point c where a new equilibrium is
achieved. This results in huge loss for producers as there is excess supply but
this can be eliminated at point c where there is a lower equilibrium price, P2
but a higher equilibrium quantity, Q2.

 

This consequence can be
solved by imposing price floors. Incomes that farmers get from selling their
products in free markets are usually unstable and too low. Unstable incomes
arise from unstable agricultural product prices, that occur due to low price
elasticities of demand and supply for agricultural products. Governments often
use PRICE SUPPORTS method to support farmers incomes.

 

 

 

figure2: price floor in
agricultural product market and government purchases of the surplus.      

 

Figure 2 illustrates the
market for chilli crops with a price floor, Pf which is set above the
equilibrium price, Pe. The price floor results in a larger quantity supplied, Qs
than the quantity supplied at market equilibrium, Qe. In addition, Pf leads to
a smaller quantity demanded and purchased than at the equilibrium price and the
quantity consumers want to buy at Pf is Qd, which is smaller than the quantity
Qe that they bought at price Pe. A price floor does not allow market to clear
and results in disequilibrium where there is excess supply (surplus). An often method
practiced by government is to buy the excess supply which causes the demand
curve for chilli crops to shift towards right to the new demand curve- D+ government
purchases. By buying up the excess supply, the government is able to maintain
the price floor at Pf. In this way the government intervenes in market in order
to protect farmers from loss.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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