Question

A huge production of onions and lack of storage facilities have caused a continuous fall in its price. This may adversely affect the production of onions in the subsequent year. With the help of a diagram, briefly explain the measures that the government should adopt to combat this situation.

Answer 1

The government can interfere by setting a minimum price, which would act as a price floor, and then buying the excess supply from the market at the rate, also known as the Minimum Support Price (MSP), from the farmers. The government should set the minimum price higher than the equilibrium price because doing so will allow it to purchase the extra inventory and keep it as buffer stock for use in the future.

SS →	Supply of onions
DD →	Demand of onions
P →	Equilibrium price of onions
P' →	Price floor
P'	P' > P
MSP →	Minimum Supply Price

If the government fixes the price OP', where P' is the floor price, which is more than the Equilibrium Price P, the diagram above shows. While demand is OQ₂ and causes surplus supply, the suppliers are ready to sell OQ₁ price. The government should buy the extra supply of MSP to keep buffer stock for future use in order to counteract this situation.