Buffer stock with price stabilization.
A buffer stock can also be used to stabilise prices. In this case, once a smaller quantity OQ-, comes onto the market, the government should ensure a price of OP0 (the stabilised price) by selling an extra output of Q-|Q0 to the consumers. When there is a shortage with output OQ-j which forces up the prices to OP1; the government will release output equivalent to QiQo- The price will then move OP0.
A buffer stock can also be used to stabilise prices. In this case, once a smaller quantity OQ-, comes onto the market, the government should ensure a price of OP0 (the stabilised price) by selling an extra output of Q-|Q0 to the consumers. When there is a shortage with output OQ-j which forces up the prices to OP1; the government will release output equivalent to QiQo- The price will then move OP0.
When less than expected output comes onto the market (OQ-]), the agency buys the commodity from the producers at a lower price OP2 but it sells at a higher price OP . The producer receives income equal to OQ-] R-j P2 which is equal to OQ0R0P0 and hence income stabilisation. However, the agency receives revenue equal to OQ-iD-iP thereby making a gain (profit) of PgR^Pv
If a greater output of OQ2 comes onto the market, the price reduces to OP3, and the producer's revenue also reduces to OQ2D2P3. In order to stabilise producer's revenue, the agency buys OQ2 at a higher price OP4 but it sells at a lower price OP3. The producer gets revenue OQ2R2P4 which is equal to OQ0RoPo and hence income stabilisation. The agency however gets revenue equal to OQ2D2P3 thereby incurring a loss equal to P3D2R2P4. This loss is assumed to be offset by the gain (P2R1D-|P1) during the shortage period.