Tomato Price Controls in a District
A district administration is worried about volatile tomato prices. A survey estimates monthly demand and supply (in quintals) at different prices: at ₹20, demand 800 and supply 400; at ₹30, demand 600 and supply 600; at ₹40, demand 400 and supply 800; at ₹50, demand 200 and supply 1,000. The market is currently at the equilibrium price. Farmer groups demand a floor price of ₹40 to protect their incomes, while consumer groups demand a ceiling of ₹20 to protect households. The administration can enforce only one policy this month and has limited storage and procurement capacity of 300 quintals. It also knows that tomatoes are perishable and that black marketing appeared during a previous ceiling. The chief minister asks for an economic analysis of both proposals, including quantities and budget implications, before choosing.
1. Identify the equilibrium price and quantity. Calculate the shortage under a ceiling of ₹20 and the surplus under a floor of ₹40. Which policy is more feasible given the procurement limit?
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Equilibrium is where demand equals supply: at ₹30, quantity demanded = quantity supplied = 600 quintals.
At a ceiling of ₹20: quantity demanded is 800 and quantity supplied is 400, so shortage = 800 − 400 = 400 quintals. The ceiling keeps the price below equilibrium, so demand exceeds supply.
At a floor of ₹40: quantity demanded is 400 and quantity supplied is 800, so surplus = 800 − 400 = 400 quintals. To maintain the floor, the government must buy the surplus.
Given procurement capacity of only 300 quintals, the floor cannot be fully enforced: 100 quintals of surplus would remain. The ceiling needs rationing but no procurement. Neither policy is fully feasible; the floor exceeds storage capacity, while the ceiling creates a 400-quintal shortage and likely queues.
2. Explain who gains and who loses under each policy, and why black marketing is likely under the ceiling but not under the floor.
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Under the ceiling, consumers who can buy at ₹20 gain, especially poor households, but all consumers face queues and rationing. Farmers lose because they receive a lower price and sell only 400 quintals instead of 600. Black marketing arises because the controlled price is below equilibrium: sellers with limited stock can charge above ₹20 illegally, and buyers are willing to pay. Quality may also deteriorate.
Under the floor, farmers gain if the government purchases the surplus, while consumers lose because they pay ₹40 and buy only 400 quintals. Since the floor is above equilibrium, there is excess supply, not excess demand. Sellers may secretly offer discounts below ₹40 to clear unsold stock, but this is discounting, not the classic black market of a shortage. Black marketing is therefore associated mainly with the ceiling.
3. If the government chooses the floor price but can procure only 300 quintals, predict what will happen to the market price and to farmer incomes. Would a direct income transfer be a better option? Give a reasoned answer.
Read the worked answer
At ₹40, supply is 800 and demand is 400. If the government buys only 300 quintals, 500 quintals remain for private buyers, but demand at ₹40 is only 400. The remaining surplus of 100 quintals puts downward pressure on the price. Farmers unable to sell at ₹40 may sell secretly below the floor, so the effective price may fall towards ₹30. Farmer incomes may not rise as much as promised, and the floor may become unenforceable.
A direct income transfer to small farmers could avoid price distortion and target the needy, but it requires fiscal space and reliable beneficiary identification. It also does not dispose of the surplus. A combination of limited procurement for buffer stocks, income support, and storage or processing investment would be more sensible than a floor alone.