Two-price scheme Buffer stock scheme

graphical example of two-price buffer stock scheme

most buffer stock schemes work along same rough lines: first, 2 prices determined, floor , ceiling (minimum , maximum price). when price drops close floor price (after new rich vein of silver found, example), scheme operator (usually government) start buying stock, ensuring price not fall further. likewise, when price rises close ceiling, operator depresses price selling off holding. in meantime, must either store commodity or otherwise keep out of market (for example, destroying it). if basket of commodities stored, price stabilization can in turn stabilize overall price level, preventing inflation. scenario illustrated on right. taking market wheat example, here, in years normal harvests (s1) price within allowed range , operator not need act. in bumper years (s3), however, prices begins fall, , government must buy wheat prevent price collapsing; likewise, in years bad harvests (s2), government must sell stock keep prices down. result far less fluctuation in price. price stability leads greater joint welfare (the sum of consumer , producer surplus.