Buffer Stocks & Information Provision (Cambridge (CIE) A Level Economics): Revision Note

Buffer stock schemes

• Buffer stocks occur when the government buys excess supply when prices are low and sells stocks when prices are high to stabilise prices

Diagram explanation

• The government sets a price floor (P2) and price ceiling (P3) to stabilise prices within a target range

• When price falls:

  • Price falls below P2 → government buys excess supply → market supply decreases → price rises back towards P2

• When price rises:

  • Price rises above P3 → government sells stocks → market supply increases → price falls back towards P3

The effectiveness of buffer stock schemes

Advantages

• Price stability

  • Helps reduce large fluctuations in prices, making prices more predictable for both producers and consumers

• Income stability for producers

  • Farmers and other producers are protected from sudden falls in prices caused by oversupply or poor market conditions

• Food security

  • Maintaining reserves can help ensure supplies are available during shortages caused by bad harvests or supply shocks

• Encourages investment

  • More stable prices and incomes may encourage producers to invest in improving productivity

Disadvantages

• High storage costs

  • Buying, storing and maintaining stocks can be expensive, especially for perishable goods

• Difficulty in setting the correct price range

  • If the intervention price is set incorrectly, the scheme may fail or require excessive government spending

• Risk of waste

  • Stored goods may spoil or become outdated, leading to losses

• Government failure

  • Poor management, forecasting errors or political pressure can make schemes inefficient

• Distorts market signals

  • Artificially stabilised prices may reduce incentives for producers to respond to changes in demand and supply

Provision of information

• Information asymmetry leads to market failure

• Governments provide information to reduce information asymmetry

Examples

• Health information

  • Governments provide information on the risks of smoking, alcohol misuse and poor diets through public health campaigns and warning labels.

• Energy efficiency labels

  • Appliances and vehicles are labelled with energy efficiency ratings to help consumers compare long-term costs and environmental impact.

• Education and careers guidance

  • Information on exam results, training options and employment prospects helps students and workers make better education and career choices.

• Food labelling

  • Nutritional information and allergy warnings allow consumers to make safer and healthier consumption decisions. E.g. traffic light system (opens in a new tab)

• Environmental information

  • Governments publish data on air quality, pollution levels and recycling to raise awareness of negative externalities.

The effectiveness of providing information

Advantages

• Addresses information failure directly

  • Helps consumers and producers make decisions based on accurate information rather than assumptions

• Preserves consumer choice

  • Individuals remain free to decide, unlike with bans or regulations

• Low cost compared to other policies

  • Often cheaper than subsidies, taxes or direct regulation

• Encourages socially desirable behaviour

  • Can reduce demerit good consumption and promote positive externalities

• Avoids market distortion

  • Does not interfere directly with prices or output

Disadvantages

• Limited effectiveness

  • Information does not guarantee behaviour will change, especially for addictive goods

• Time lag

  • Public attitudes and habits may take a long time to adjust

• Unequal impact

  • More educated or higher-income groups may benefit more from the information provided

• Risk of misinformation or bias

  • Information may be unclear, outdated or influenced by political interests

• Requires consumer engagement

  • Assumes individuals will understand and act upon the information given