Ragi, a Support Price and a Ceiling: The Collector's Note
In a Karnataka district the monthly demand for ragi is Qd = 1,00,000 − 10,000P and domestic supply is Qs = 10,000P, where Q is in quintals and P is in ₹ per quintal. The government announces a minimum support price of ₹7 per quintal and promises to buy whatever farmers cannot sell at that price. Farmers respond by expanding ragi area and switching out of other millets. Consumer groups protest that they now pay more for their staple. A students' group counters that if the government truly wanted to help consumers it should instead fix a maximum price of ₹4. The district collector must send a one-page note on both proposals, with quantities and money amounts, to the state agriculture department.
1. Find the equilibrium price and quantity, then work out the quantities demanded and supplied at the ₹7 support price, the surplus procured, and the procurement bill.
Read the worked answer
Set Qd = Qs: 1,00,000 − 10,000P = 10,000P → 20,000P = 1,00,000 → P = ₹5, and Q = 50,000 quintals.
At the support price of ₹7, which is above equilibrium:
- Qd = 1,00,000 − 70,000 = 30,000 quintals
- Qs = 10,000 × 7 = 70,000 quintals
- Surplus to be procured = 40,000 quintals
- Bill = 40,000 × ₹7 = ₹2,80,000 per month, plus storage and transport.
The gap has two causes working together: the higher price cuts quantity demanded by 20,000 quintals and raises quantity supplied by 20,000 quintals. Consumers buy less and pay more (consumer surplus falls); farmers sell more at a higher price; the budget absorbs the difference. This is the classic price-floor result - the floor helps sellers only if the government actually removes the surplus from the market.
2. Now evaluate the proposed ceiling of ₹4: quantify the gap, name the symptoms it produces, and explain why it is not simply the mirror image of the support price.
Read the worked answer
At P = ₹4:
- Qd = 1,00,000 − 40,000 = 60,000 quintals
- Qs = 40,000 quintals
- Shortage = 20,000 quintals
Symptoms: queues and rationing, a black market - buyers are willing to pay up to ₹6 for the 40,000th quintal (from Qd = 40,000 → P = ₹6), so sellers can charge well above ₹4 - tie-selling and quality dilution, and a fall in farmers' receipts that discourages the next crop.
It is not a mirror image: the support price creates a 40,000-quintal surplus that the government must buy and store, while the ceiling creates a 20,000-quintal shortage that no agency can conjure away. One costs the budget, the other costs the market. Note also that a price fixed at the equilibrium ₹5 would change nothing at all - only a price held away from equilibrium has effects.
3. Write the judgement the collector should record: which intervention, and under what modification, given that the stated aim is farmer income?
Read the worked answer
If the aim is farmer income, the support price targets the right group, because a ceiling lowers the price farmers receive and a shortage does not raise their incomes at all. But the collector should record two warnings.
First, ₹7 generates a permanent 40,000-quintal surplus, so the ₹2,80,000 monthly bill is only the visible cost; storage, spoilage and disposal are the invisible ones, and procured stock sold below cost adds to it. Second, the switch out of other millets carries an opportunity cost in the district's diet and soil - the supply response, not just the price, is part of the outcome.
Better-designed options to note: a support price closer to equilibrium combined with a production or procurement cap, or a direct income transfer to farmers that does not require growing a surplus at all; and if cheap ragi for poor households is also wanted, a targeted ration at ₹4 with the government paying farmers the difference, which avoids a shortage. Judgement: support the price for farmers, but do not promise to buy unlimited quantity at a price 40% above equilibrium.