explain in detail how price ceiling gives rise to black marketing and price floor to buffer stocks.?
In order to offset excess demand, government lays down fixed quota. For instance, in order to curb down the excess demand in the recent time for onions, government has laid down fixed quota of purchase of maximum 3 kg for a family of four people. Consequent to this fixed quota, the needs of the consumer remain unfulfilled.Accordingly, some of the unsatisfied consumers get ready to pay higher price for the additional quantity. This leads to black-marketing and artificial shortage in the market.
Due to price floor, the minimum support price is artificially maintained at a price level that is higher than the equilibrium price. Now, as you can see in the below figure that at this price, the quantity demanded is q'd, whereas, the farmers are ready to supply q's units of wheat. Certainly, there exists a situation of excess supply of AB units of wheat (i.e. q's – q'd). In this particular graph, q'd units of wheat is purchased in the open market by the traders and the consumers at price OP•. The excess units (AB) of wheat is purchased by the government at price OP• and stores it as buffer stocks. The buffer stocks are drawn down to ensure smooth flow of wheat and other important food grains in the years of bad monsoon and at the time of any natural calamity such as, flood, drought, etc.
Due to price floor, the minimum support price is artificially maintained at a price level that is higher than the equilibrium price. Now, as you can see in the below figure that at this price, the quantity demanded is q'd, whereas, the farmers are ready to supply q's units of wheat. Certainly, there exists a situation of excess supply of AB units of wheat (i.e. q's – q'd). In this particular graph, q'd units of wheat is purchased in the open market by the traders and the consumers at price OP•. The excess units (AB) of wheat is purchased by the government at price OP• and stores it as buffer stocks. The buffer stocks are drawn down to ensure smooth flow of wheat and other important food grains in the years of bad monsoon and at the time of any natural calamity such as, flood, drought, etc.