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In: Economics

Why do governments frequently attempt to control agricultural prices and food prices?

Why do governments frequently attempt to control agricultural prices and food prices?

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Expert Solution

If the food market is allowed to operate completely free, the food price will be determined by demand and supply forces. The higher (lower) the demand and the lower (higher) the supply of food, the higher (lower) the price. If price of food rises too high as to significantly increase inflation, reducing purchasing power for common public, government attempts to keep food prices lower by imposing a price ceiling below the equilibrium price determined by demand and supply.

Similarly, if the agricultural market is allowed to operate completely free, price of the agricultural produce will be determined by demand and supply forces. The higher (lower) the demand and the lower (higher) the supply of food, the higher (lower) the price. If price of agricultural produce falls too low as to significantly decrease farmer incomes, government attempts to keep agricultural prices higher by imposing a price floor above the equilibrium price determined by demand and supply.

Rahul Sunny answered 2 years ago
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