In a country, the equilibrium price of wheat was determined at Rs. 100 per kg. as part of agricultural price support program and the government set the minimum support price at Rs. 120. At this new price, the supply is much greater than demand creating a situation of excess supply. This excess supply can lead to fall in prices. Government wanted to help the farmers but ended up creating a problem. What should government do now?
Answer & explanation
Correct answer: option 3
The correct answer is option 3: Buy the surplus at minimum price fixed by it
- The government introduced a minimum support price (MSP) of Rs. 120, which is above the equilibrium price of Rs. 100.
- This higher price encouraged more production, but reduced consumer demand, leading to excess supply (surplus).
- If no action is taken, market forces would push the price down, defeating the purpose of the MSP.
What should the government do?
- The best solution is for the government to buy the surplus at the MSP (Rs. 120) and store or distribute it through welfare programs.
- This ensures that farmers get the promised price, and the surplus does not lead to a market crash.