Economics Project Price Floor

NATIONAL LAW INSTITUTE UNIVERSITY BHOPAL

ECONOMICS PROJECT On

PRICE FLOOR: MINIMUM SUPPORT PRICE and INDIAN AGRICULTURE

Submitted t P!" Ra#e$% Gautam Submitted b& 'una( S%a!ma )*+, BALLB -,

Contents PRICE .LOOR/ A B!ie" Int!du0tin111111111111111111111111111111111111111111111111111111111111111111111111111111, Unde!$tandin2 T%e P!in0i3(e/111111111111111111111111111111111111111111111111111111111111111111111111111111111111114 MAR'ET E5UILIBRIUM111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 4 GOVERNMENTS ROLE AND .UNCTION111111111111111111111111111111111111111111111111111111111111111111111111 6 Minimum Su33!t P!i0e11111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +* and T%e Indian A2!i0u(tu!e111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +* E7e0t$ " P!i0e .(!1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +) S%!t Te!m E7e0t$/111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +) Ln2 te!m E7e0t$/1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +, Re8ie9 " Lite!atu!e1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +: +1

Pu($e " t%e natin111111111111111111111111111111111111111111111111111111111111111111111111111111111111111+:

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P!i0e .(!$ "! Emi$$in$ T!adin21111111111111111111111111111111111111111111111111111111111111111+:

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An e0nmi0 ana(&$i$ " P!i0e d&nami0$ in t%e 3!e$en0e " a P!i0e ;!/1111+-

 T%e 0a$e " Ame!i0an C%ee$e1111111111111111111111111111111111111111111111111111111111111111111111111111 +41

Sme 8a!ian0e e7e0t$ " a ;! 3!i0e $0%eme "! 9(/111111111111111111111111111111+<

A t9 3e!id ana(&$i$11111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +< :1 Mana2in2 5uantit&= 5ua(it& and Timin2 in Cane Su2a! P!du0tin/ E> P$t Ma!?etin2 Pe!mit$ ! E> Ante P!du0tin Cnt!a0t$@11111111111111111111111111111111111111111+ Cn0(u$in1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 +6 Bib(i2!a3%&1111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111 )*

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PRICE .LOOR/ A B!ie" Int!du0tin What is Price Floor? P!i0e .(! ! ;! be(9 9%i0% 3!i0e$ a!e nt a((9ed t "a(( i$ nt%in2 but t%e (9e$t (e2a( 3!i0e t%at a 0mmdit& 0an be $(d at1 It i$ an e0nmi0 me0%ani$m " 3!i0e 0nt!( u$ed b& t%e 28e!nment "  0unt!ie$ t 3!e8ent 3!i0e$ "!m bein2 t (9 $ t%at "ai! 3!i0e$ "! 2d$ a!e a8ai(ab(e t t%e $e((e!$ " $u0% 2d$1  T%e unde!(&in2 3!in0i3(e " P!i0e .(! i$ t%e 0n0e3t " Ma!?et Eui(ib!ium1 .! a 3!i0e ;! t be e7e0ti8e= it mu$t be $et ab8e t%e eui(ib!ium 3!i0e1 I"  it$ nt ab8e eui(ib!ium= t%en t%e ma!?et 9nt $e(( be(9 eui(ib!ium and t%e 3!i0e ;! 9i(( be i!!e(e8ant .. In a mi>ed $0ia(i$t e0nm& $u0% a$ u!$ 9%e!e t%e 28e!nment $te3$ in t 3!te0t t%e inte!e$t " t%e 3e3(e $u0% P!i0e ;!in2 i$ 8e!& 8ita( t "a0i(itate t%e 9e("a!e "un0tin " t%e 28e!nment1  T%e m$t 0mmn 3!i0e ;! i$ t%e minimum 9a2et%e minimum 3!i0e t%at 0an be 3aid "! (abu!1 P!i0e ;!$ a!e a($ u$ed "ten in a2!i0u(tu!e t t!& t 3!te0t t%e "a!me!$ and Minimum Su33!t P!i0e MSPF "und t%!u2%ut u! 0unt!&$ Pub(i0 Di$t!ibutin S%3$ ! .ai! P!i0e S%3$1  T%u$= t%!u2% t%i$ $tud& 9e 9i(( be ab(e t unde!$tand P!i0e .(! a$ a t( "  9e("a!e e0nmi0$ in India= it$ u$e$ and t%e 3!in0i3(e$ n 9%i0% it 9!?$ n= in a 0m3!e%en$i8e and $&$temati0 manne!1

Unde!$tandin2 T%e P!in0i3(e/ MAR'ET E5UILIBRIUM B!ad(& $3ea?in2= Eui(ib!ium i$ a $tate " !e$t ! ba(an0e due t t%e eua( a0tin " 33$in2 "!0e$1 In te!m$ " E0nmi0$= Eui(ib!ium P!i0e i$ t%e 3!i0e t9a!d 9%i0% t%e in8i$ib(e %and d!i8e$ t%e ma!?et1 At t%i$ 3int= t%e u39a!d and d9n9a!d 3!e$$u!e n 3!i0e i$ eua( and t%e uantit& demanded

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eua($ t%e uantit& $u33(ied1 T%e ma!?et me0%ani$m natu!a((& 3!e$ent in m$t ma!?et$ 0n$i$t$ " t%e$e 0unte!ba(an0in2 3!e$$u!e$1 Eui(ib!ium 0an 00u! in a(( t&3e$ " ma!?et$= but t%e 0mmn(& a$$umed mde( "! it$ 00u!!en0e i$ t%e 3e!"e0t(& 0m3etiti8e ma!?et1 W%en a ma!?et i$ in eui(ib!ium= t%e!e i$ n e>0e$$ $u33(& ! e>0e$$ demand1 Eui(ib!ium uantit& i$ t%e amunt bu2%t and $(d at t%e eui(ib!ium 3!i0e1 It ma& be unde!$td b& a $im3(e tab(e= ?n9n a$ a $0%edu(e tab(e +F= and a 2!a3% .i2 +F/  Tab(e +

Price of Commodity +* 16.25 )*

Quantity Supplied ):=*** 37,500 4:=***

Quantity Demanded :*=*** 37,500 ,*=***

.i2 +F

Explanation of the Schedule ta!le "# and $raph Fi% "#: In e0nmi0$= 9e t&3i0a((& u$e a t9dimen$ina( 2!a3% t%at %a$ t%e 3!i0e "  t%e 2d ! $e!8i0e n t%e Ya>i$ 8e!ti0a( a>i$F and t%e uantit& t%at 3e3(e a!e 9i((in2 and ab(e t bu& ! 9i((in2 and ab(e t $e((F n t%e a>i$ %!inta( a>i$F1 Ea0% 3int n t%e 2!a3% !e3!e$ent$ t%e 0!!e$3ndin2 3!i0e and uantit& demanded1 At R$1 +*= t%e 3!du0e! 3!du0e$ ):=*** unit$ " t%e 0mmdit& a$ 33$ed t a demanded uantit& " :*=*** t%u$ $%9in2 a $%!ta2e " 

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$u33(&1 At Eui(ib!ium 3!i0e 9%i0% i$ R$1 +-1): %e!eF= t%e uantit& " 2d$ demanded i$ e>a0t(& eua( t t%e uantit& " 2d$ $u33(ied1 W%i(e at R$1 )* t%e uantit& $u33(ied i$ 4:=*** unit$ a$ 33$ed t a (e$$e! uantit& demanded " ,*=*** unit$ 9%i0% (ead$ t an e>0e$$ in $u33(&1  T unde!$tand t%e P!i0e .(! mde(= 9e mu$t unde!$tand t%e$e t9 main 0n0e3t$ !e2a!din2 Ma!?et Eui(ib!ium i1e1 t%e 0!eatin " e>0e$$ $u33(& and e>0e$$ demand a$ e>3(ained b& .i2 )/

.i2 )F

He!e .i2 )F it 0an be $een t%at an& 3!i0e P+F ab8e t%e Eui(ib!ium P!i0e EPF (ead$ t t%e 0!eatin " e>0e$$ $u33(& t%e b(ue $%aded !e2inF 9%e!ea$ at 3!i0e P)F be(9 t%e Eui(ib!ium P!i0e EPF e>0e$$ demand i$ 0!eated ! t%e!e i$ a $%!ta2e in $u33(&a$ $een in t%e !ed $%aded !e2inF1 He!e 9e 0n0e!n u!$e(8e$ 9it% t%e e>0e$$ $u33(& t%at i$ 0!eated a$ a !e$u(t " !ai$in2 t%e 3!i0e ab8e t%e eui(ib!ium 3!i0e1 It ma& be nted t%at i" t%e 3!i0e i$ $et be(9 t%e Eui(ib!ium P!i0e it 9u(d be ine7e0ti8e a$ t%e 3!i0e 9u(d be (9e! t%an t%e Eui(ib!ium P!i0e and t%u$ nnbindin2 n t%e 3!du0e!$1

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.i2 ,F He!e .i2 ,F t%e P!i0e . i$ (9e! t%an t%e de$i!ed Eui(ib!ium P!i0e 9%i0% i$ t%e 3!i0e at 9%i0% ma>imum $ati$"a0tin t bt% 0n$ume!$ and 3!du0e!$ in a ma!?et i$ a0%ie8ed1 T%e!e"!e t be e7e0ti8e= t%e 3!i0e mu$t be $et ab8e t%e Eui(ib!ium P!i0e1 A$ mentined ea!(ie!= at Eui(ib!ium P!i0e t%e uantit& " 2d$ $u33(ied and demand a!e e>a0t(& eua(1 W%en t%e 3!i0e i$ $et ab8e t%e Eui(ib!ium P!i0e= t%en t%e!e i$ a 3$$ibi(it& t%at t%e!e 9i(( be an e>0e$$ $u33(& ! a $u!3(u$1 I" t%i$ %a33en$= 3!du0e!$ 9% 0ant "!e$ee t!ub(e a%ead 9i(( 3!du0e t%e (a!2e! uantit& 9%e!e t%e ne9 3!i0e inte!$e0t$ t%ei! $u33(& 0u!8e1 Unbe?n9n$t t t%em= 0n$ume!$ 9i(( nt bu& t%at man& 2d$ at t%e %i2%e! 3!i0e and $ t%$e 2d$ 9i(( 2 un$(d1 T%i$ i$ t%e unde!(&in2 3!in0i3(e " P!i0e .(!1 In t%i$ $0ena!i t%e in8i$ib(e %and "  ma!?et "!0e$ %e!e 9i(( natu!a((& d!i8e t%e 3!i0e$ d9n9a!d$ in 0a$e "  e>0e$$ $u33(& t b!in2 it ba0? t t%e eui(ib!ium 3!i0e1 An e>am3(e be(9 $%9in2 bt% t%e S0%edu(e tab(e )F and G!a3% .i2 4F "  t%e P!i0e ;! i$ 2i8en be(91

 Tab(e ) Price of Commodity +* 16.25 )*

Quantity Supplied ):=*** 37,500 4:=***

Quantity Demanded :*=*** 37,500 ,*=***

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.i2 4F He!e t%e 3!i0e . )*F i$ ab8e t%e eui(ib!ium 3!i0e +-1):F E be0au$e it i$ $u33$ed t%at t%e 3!i0e E de$ nt 3!8ide in0enti8e$ t t%e "a!me!$ t 3!du0e1 T%e!e"!e t 3!mte $u0% 3!du0tin b& "a!me!$ 28e!nment ?ee3$ t%e 3!i0e at P!i0e .1 A$ a !e$u(t " $u0% 3!i0in2 ab8e t%e Eui(ib!ium P!i0e E t%e!e a$ 0an be $een "!m t%e dia2!am K2 4F i$ 0!eated= a $u!3(u$ in t%e ma!?et a$ $%9n in t%e $%aded !e2inF a$ "a!me!$ e>3and t%ei! ut3ut and $u33(&1

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GOVERNMENTS ROLE AND .UNCTION  T%e Indian e0nm& i$ a Mi>ed S0ia(i$t e0nm& i1e1 9%i(e !etainin2 t%e "!ee ma!?et "eatu!e= t%e 28e!nment $te3$ in t !e2u(ate and de!e2u(ate t%e 3!i0e$ a$ and 9%en it i$ !eui!ed "! t%e 9e("a!e " t%e 3e3(e1 T%e 28e!nment u$e$ t%e e0nmi0 t( " P!i0e Cnt!( t 0a!!& ut $u0% "un0tin$1 P!i0e .(!$ and P!i0e Cei(in2$ a!e $u0% Price Controls= e>am3(e$ "  28e!nment inte!8entin in t%e "!ee ma!?et 9%i0% 0%an2e$ t%e ma!?et eui(ib!ium1 T%e& ea0% %a8e !ea$n$ "! u$in2 t%em1 P!i0e Cei(in2$ a!e ma>imum 3!i0e$ $et b& t%e 28e!nment "! 3a!ti0u(a! 2d$ and $e!8i0e$ t%at t%e& be(ie8e a!e bein2 $(d at t %i2% " a 3!i0e and t%u$ 0n$ume!$ need $me %e(3 3u!0%a$in2 t%em1 P!i0e 0ei(in2$ n(& be0me a 3!b(em 9%en t%e& a!e $et be(9 t%e ma!?et eui(ib!ium 3!i0e1 On t%e t%e! %and= P!i0e .(!$ a!e minimum 3!i0e$ $et b& t%e 28e!nment "! 0e!tain 0mmditie$ and $e!8i0e$ t%at it be(ie8e$ a!e bein2 $(d in an un"ai! ma!?et 9it% t (9 " a 3!i0e and t%u$ t%ei! 3!du0e!$ de$e!8e $me a$$i$tan0e1 P!i0e ;!$ a!e n(& an i$$ue 9%en t%e& a!e $et ab8e t%e eui(ib!ium 3!i0e= $in0e t%e& %a8e n e7e0t i" t%e& a!e $et be(9 ma!?et eui(ib!ium 3!i0e1 He!e 9e di$0u$$ %9 t%e 28e!nment in India 3(a&$ a !(e in $ettin2 $u0% P!i0e ;!$ 9%i0% 3(a& an im3!tant 9e("a!e "un0tin1

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Minimum Su33!t P!i0e and T%e Indian A2!i0u(tu!e  T%e Minimum Su33!t P!i0e MSPF S0%eme i$ a $0%eme " t%e G8e!nment " India GOIF t $a"e2ua!d t%e inte!e$t$ " t%e "a!me!$1 Unde! t%i$ S0%eme t%e GOI de0(a!e$ t%e minimum $u33!t P!i0e$ " 8a!iu$ a2!i0u(tu!a( 3!du0e$ and a$$u!e$ t%e "a!me!$ t%at t%ei! a2!i0u(tu!a( 3!du0e 9i(( be 3u!0%a$ed at t%e MSP= t%e!eb& 3!e8entin2 it$ di$t!e$$ $a(e1 T%e .d C!3!atin " India .CIF a0t$ a$ t%e Nda( A2en0& " t%e GOI1 T%e Minimum Su33!t P!i0e$ 9e!e annun0ed b& t%e 28e!nment " India "! t%e K!$t time in +6---< "! W%eat in t%e 9a?e " t%e G!een Re8(utin and e>tended %a!8e$t= t $a8e t%e "a!me!$ "!m de3(etin2 3!Kt$1 Sin0e t%en= t%e MSP !e2ime %a$ been e>3anded t man& 0!3$1 Cu!!ent(&= t%e MSP i$ annun0ed b& t%e G8e!nment " India "! ): 0!3$ at t%e be2innin2 " ea0% $ea$n 8i1 Rabi and '%a!i"1 T%e "((9in2 a!e "e9 "  t%e 0!3$ 08e!ed in t%e t9 $ea$n$ a$ $%9n in t%e "((9in2 tab(e1

&harif Crops Padd&  J9a! Ba#!a Maie Cttn

Ra!i Crops W%eat Ba!(e& G!am Ma$u! (enti(F Mu$ta!d

 T%e ma!?et 3!i0e 0an $metime$ be $ (9 t%at "a!me!$ 0annt ma?e enu2% mne& t $u33!t t%em$e(8e$1 In $u0% 0a$e$= t%e 28e!nment $te3$ in and $et$ a 3!i0e ;!1 T%e !atina(e i$ t%at i" t%e!e i$ a "a(( in t%e 3!i0e$ " t%e 0!3$= a"te! a bum3e! %a!8e$t= t%e 28e!nment 3u!0%a$e$ at t%e MSP and t%i$ i$ t%e !ea$n t%at t%e 3!i0e 0annt 2 be(9 MSP1 S t%i$ di!e0t(& %e(3$ t%e "a!me!$1  T%e 28e!nment de0ide$ t%e $u33!t 3!i0e$ "! 8a!iu$ a2!i0u(tu!a( 0mmditie$ a"te! ta?in2 int a00unt 8a!iu$ !e0mmendatin$ "  Cmmi$$in "! A2!i0u(tu!a( C$t$ and P!i0e$= 8ie9$ " mini$t!ie$ and $tate 28e!nment$ and t%e! !e(e8ant "a0t!$1

+*

Nti0e t%at 9%en t%e 3!i0e i$ a!tiK0ia((& !ai$ed ab8e 3= t%e uantit& $u33(ied e>0eed$ t%e uantit& demanded1 Su0% a $ituatin i$ 0a((ed a $u!3(u$/ "a!me!$ 3!du0e man& m!e 0!3$ t%an bu&e!$ 9ant t bu& at t%e ne9= %i2%e! 3!i0e1F

E7e0t$ " P!i0e .(!  T%e a!2ument "! 3!i0e ;!$ i$ u$ua((& t%at t%e 28e!nment %a$ t 3!te0t $u33(ie!$ "!m %a8in2 t $e(( t%ei! 2d$ at an un"ai!(& (9 3!i0e1 T%e& a!e "ten meant t 3!te0t $u33(ie!$ t%at a!e 0n$ide!ed t be im3!tant be0au$e t%e& 3!8ide a ne0e$$it&1 H9e8e! t%e!e a!e 8a!iu$ $%!t te!m and (n2

++

te!m e7e0t$ " $u0% P!i0e ;! 9%i0% a!e 0n$ide!ed b& man& a$ ne2ati8e e7e0t$ n t%e e0nm&1

S%!t Te!m E7e0t$/ In t%e $%!t !un= a 3!i0e ;! 9i(( %a8e n e7e0t n t%e $u33(& 0u!8e1 Due t t%e P!i0e ;! e7e0t= 0n$ume!$ 3a& a %i2%e! 3!i0e and de0ide t !edu0e t%ei! 3u!0%a$e$= 9%i(e 3!du0e!$ Knd t%e& a!e 2ua!anteed a %i2%e! 3!i0e t%an be"!e and t%e& !ai$e 3!du0tin1 T%i$ 9i(( in0!ea$e t%e uantit& $u33(ied i" t%e 3!i0e ;! i$ bindin2= t%at i$= t%e 3!i0e i$ %i2%e! t%an t%e ma!?et 3!i0e1 T%i$ 0au$e$ $u!3(u$ " t%e 3!du0t and a dead9ei2%t ($$1

Example / Let$ $a& t%at t%e 3!i0e " 9%eat i$ "a((in2 $ t%e 28e!nment im3$e$ a 3!i0e ;! n 9%eat at R$ +*?21 I" t%e ma!?et 9e!e (e"t t it$e("= 9%eat 9u(d e8entua((& "a(( t R$1?21 On0e a2ain it i$ 0(ea! t%at (e$$ 9%eat i$ 2in2 t be bu2%t at R$1+* t%an at R$1 9%i0% mean$ t%e!e 9i(( be a 0%!ni0 $u!3(u$ " 9%eat1 T%e e>0e$$ 9u(d eit%e! $3i(= be di$0a!ded= ! be 3u!0%a$ed b& t%e 28e!nment1 P!du0e!$ 9% 9u(d 2 ban?!u3t i" t%e 3!i0e 9e!e a((9ed t !ea0% eui(ib!ium 9u(d be ab(e t !emain in bu$ine$$ be0au$e " t%e a!tiK0ia((& %i2% 3!i0e1 T%$e 3!du0e!$ 9u(d 0n$ide! t%i$ t be a beneKt1

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 T%e beneKt t 3!du0e!$ " t%e 3!i0e $u33!t i$ eua( t t%e 2ain in 3!du0e! $u!3(u$ !e3!e$ented in b(ueF1  T%e 0$t t 0n$ume!$ " t%e 3!i0e $u33!t i$ eua( t t%e ($$ in 0n$ume! $u!3(u$ !e3!e$ented in !edF1  T%e 0$t t t%e 28e!nment " t%e 3!i0e $u33!t i$ eua( t t%e 0$t "  t%e $u!3(u$ in t%e ma!?et !e3!e$ented in 2!a&F1

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H9e8e!= $in0e t%e 0n$ume!$ u(timate(& 3a& ta>e$ "! t%e 28e!nment t 3u!0%a$e t%e $u!3(u$= t%e tta( 0$t t 0n$ume!$ in t%e $%!t !unF " t%e 3!i0e $u33!t i$ t%e $um " t%e ($$ in 0n$ume! $u!3(u$ and t%e 0$t "  t%e 28e!nment 3u!0%a$in2 t%e $u!3(u$ 7 t%e ma!?et1

Ln2 te!m E7e0t$/ In t%e (n2 !un= a bindin2 3!i0e ;! 9i(( indu0e ma!?et ent!an0e in 3e!"e0t(& 0m3etiti8e ma!?et$= 9%i0% 9i(( 0au$e $u33(& t in0!ea$e  t%i$ i$ !e3!e$ented a$ an ut9a!d $%i"t " t%e $u33(& 0u!8e  be0au$e K!m$ 9i(( be ab(e t $e(( t%ei! 3!du0t at ab8e t%ei! a8e!a2e tta( 0$t= 9%i0% 0!eate$ an e0nmi0 3!Kt1 Sin0e 3!i0e$ 0annt "a((= t%i$ mean$ t%at e0nmi0 3!Kt$ ma& nt "a(( t n!ma(= indu0in2 0ntinued K!m ent!an0e and e8e!(a!2e! $u!3(u$e$= and t%i$ ma& ma?e t%e 3!i0e ;! im3$$ib(e t maintain in t%e (n2 !un1 In t%e ab8e mentined e>am3(e " t%e 28e!nment $ettin2 a 3!i0e ;! "! 9%eat= t%e 0n$ume!$ 9% a!e 3a&in2 m!e "! 9%eat ! bu&in2 (e$$ 9%eat t%an t%e& 9ant 9u(d 0n$ide! it a 3ena(t&1 P!du0e!$ 9u(d beneKt b& nt ($in2 t%ei! #b$1 T%e 8e!a(( e0nm& i$ 3ena(ied be0au$e 3e3(e 9% 9u(d t%e!9i$e %a8e t 3!du0e $met%in2 t%at$ m!e in demand a!e ab(e t $ta& in an ine0ient bu$ine$$1 Simi(a!(&= 9%en t%e 28e!nment im3$e$ a minimum 9a2e t 3!8ide a "ai! 9a2e t 9!?e!$ t%e e7e0t$ in0(ude %i2%e! 9a2e$ "! $me 3e3(e a(n2 9it% unem3(&ment 0%!ni0 $u!3(u$ " 9!?e!$ a$ bu$ine$$e$ 9i(( %i!e "e9e! 3e3(e due t t%e %i2%e! 0$t " (ab!F= ban?!u3t0& " ma!2ina( 3!du0e!$= !i$e in 3!i0e$1 T%e$e a!e in0(uded a$ $me " t%e ne2ati8e e7e0t$ " $u0% P!i0e ;!in2 in t%e (n2 !un1

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Re8ie9 " Lite!atu!e

+1 Pu($e " t%e natin Editor, The Hindu

 T%e Edit!= Bu$ine$$ Line in %i$ edit!ia( a!ti0(e dated  ul! 26, 2013 %a$ !e8ea(ed t%e need "! MSP$ "! 3u($e$ (i?e 2!am= 0%ana= et01 in t%e 0unt!&1 He $ta!t$ b& em3%a$iin2 t%e "a0t t%at India bein2 a 0%!ni0 im3!te! "  3u($e$ %a$ dne 9e(( in t%e !e0ent &ea!$ in te!m$ " dme$ti0 3!du0tin but %i2%(i2%t$ t%e 2!im "a0t t%at t%e 3!i0e$ a!e mu0% (9e! t%an !eui!ed t%e!e bein2 n adeuate ;! 3!i0e $et b& t%e 28e!nment "! t%e $ame1 5utin2 t%e !e0ent 3!i0e 0!a$% in C%ana 3!i0e$= %e $t!e$$e$ t%at t%e 28e!nment mu$t in0enti8i$e t%e "a!me!$ t 2!9 m!e 3u($e$ a$ t%e& %a8e 8a!iu$ nut!itina( 8a(ue$ 0n$ide!in2 t%e nut!itin deK0ien0& in t%e 0unt!&F and a($ "un0tin$ a$ a nit!2en K>e!1 He i$ " t%e 3inin t%at i" t%i$ 0ntinue$ it 9i(( di$0u!a2e "a!me!$ "!m 3!du0in2 3u($e$1 He u!2e$ t%e 28e!nment t en$u!e t%at "a!me!$ 2et t%e 0ia((& de0(a!ed MSP$ "! t%e 0!3 t be %a!8e$ted a 0u3(e " mnt%$ "!m n91 In t%e ab$en0e " 3%&$i0a( 3!0u!ement $u33!t= t%e$e MSP$ %a8e meanin2 n(& n 3a3e! and t%e ne9 Natina( .d Se0u!it& (e2i$(atin ma& a22!a8ate t%i$= 2i8en it$ $(e "0u$ n 2ua!anteein2 a minimum uantit& "  0e!ea($ a$ a (e2a( entit(ement t t9t%i!d$ " t%e 33u(atin1 T%i$ 9i((= in tu!n= "u!t%e! $?e9 u! 3ub(i0 !e$u!0e$ and 3!0u!ement e7!t$1

)1 P!i0e .(!$ "! Emi$$in$ T!adin2 Peter ohn Wood and Fran"  ot#o

Wood Peter and ot#o Fran"  )**6F in t%ei! a!ti0(e  Price Floors $or E%issions Tradin&' %a8e !e8ea(ed t%e ad8anta2e$ " P!i0e ;!in2 "! emi$$in t!adin2 and %a8e 2i8en $u22e$tin$ "! t%e $ame n %9 t%e 28e!nment 0an ta0?(e t%e i$$ue at %and1 T%e& %a8e di$0u$$ed t%e ad8anta2e$ " 3!i0e ;!in2 "! emi$$in$ t!adin2 and im3(ied t%at P!i0e ;!$ need t be 0a!e"u((& de$i2ned t a8id bud2eta!& (iabi(itie$= and t a8id ba!!ie!$ t inte!natina( t!ade in 3e!mit$1 T%e& "u!t%e! a!2ue t%at t%e m$t di!e0t a33!a0% " a 28e!nment 0mmitment t bu& ba0? 3e!mit$ at a t%!e$%(d 3!i0e i$ un(i?e(& t be 8iab(e= e$3e0ia((& in t%e 0nte>t " inte!natina( 3e!mit t!adin2= be0au$e it im3(ie$ (a!2e 0ntin2ent bud2eta!& (iabi(itie$ but t%at an a(te!nati8e a33!a0% " a minimum !e$e!8e 3!i0e "! au0tined 3e!mit= 0u(d &ie(d t%e de$i!ed e7e0t=

+4

but 0u(d be ine7e0ti8e i" t%e $%a!e " au0tinin2 i$ $ma((1 T%e& %a8e u$ed 8a!iu$ e0nmi0 t($ " !e$ea!0% $u0% a$ 2!a3%$= $0%edu(e and t%e! !e(e8ant data t $u33!t t%e $ame1 Cn0(udin2= 3!i0e ;!$ 0u(d "u(K(( an im3!tant $u33!tin2 !(e in en$u!in2 e7e0ti8e and e0ient 0(imate 0%an2e miti2atin= t%e& 0an be im3(emented 9it%ut 0m3!mi$in2 8ita( a$3e0t$ " emi$$in$ t!adin2= and t%ei! bud2eta!& 3!3e!tie$ ma& tu!n ut t be %i2%(& att!a0ti8e t 28e!nment$1 ,1 An e0nmi0 ana(&$i$ " P!i0e d&nami0$ in t%e 3!e$en0e " a P!i0e ;!/  T%e 0a$e " Ame!i0an C%ee$e  ean(Paul Cha)as and *+ansoo *i%

Cha)as ean(Paul and *i% *+ansoo )**:F in t%ei! a!ti0(e  n econo%ic anal!sis o$ Price d!na%ics in the -resence o$ a Price oor/ The case o$   %erican Cheese'   %a8e 3!8ided u$e"u( in$i2%t$ n 3!i0e d&nami0$ in t%e 3!e$en0e " a 28e!nment dete!mined 3!i0e ;!1 In t%e 3a3e! t%e& %a8e 3!8ided an e0nmet!i0 ana(&$i$ " t%e e7e0t$ " P!i0e ;! n 3!i0e d&nami0$ and 3!i0e 8(ati(it&1 .0u$$in2 n t%e P!i0e ;! 3!8idin2 a 0en$!in2 me0%ani$m t 3!i0e dete!minatin= t%e& %a8e $3e0iKed and e$timated t9 0m3etin2 mde($ 9it% d&nami0 Tbit $3e0iK0atin unde! time 8a!&in2 8(ati(it&1 In t%ei! e0nmi0 ana(&$i$ t%e& %a8e re)ealed t%!ee im3!tant Kndin2$1 .i!$t= t%e& d0umented %9 t%e 3!i0e $u33!t 3!2!amme 0nt!ibuted t !edu0in2 3!i0e 8(ati(it& and $e0nd(& t%e& un08e!ed e8iden0e t%at $u0% 8(ati(it&!edu0in2 e7e0t$ a!e mu0% $t!n2e! in t%e $%!t !un t%an t%e (n2 !un1 T%i!d(& t%e& %a8e a($ "und t%at e8en unde! t%e ma!?et !e2ime $0ena!i t%e $u33!t 3!i0e 0an %a8e $i2niK0ant 3$iti8e $ide e7e0t$ n (n2 !un e>3e0ted 3!i0e$1 T%e& %a8e $u33!ted t%e $tud& 9it% em3i!i0a( e8iden0e n t%e d&nami0$ " Ame!i0an 0%ee$e 3!i0e$ and t%ei! 0%an2in2 8(ati(it&1 Cn0(u$i8e(& t%e& %a8e e8a(uated t%e 9e("a!e e7e0t$ " 0%an2in2 t%e 3!i0e $u33!t (e8e( indi0atin2 t%at a(t%u2% (9e! $u33!t 3!i0e$ !edu0e ta>3a&e! 0$t and a22!e2ate 9e("a!e ($$= t%e& mi2%t nt im3!8e t%e !e(ati8e e0nmi0 e0ien0& " t!an$"e!!in2 in0me "!m 0n$ume!$ and ta>3a&e!$ t 3!du0e!$1 41 Sme 8a!ian0e e7e0t$ " a ;! 3!i0e $0%eme "! 9(/ A t9 3e!id ana(&$i$  .H. ulo!

+:

ulo! .H1 +6-4F in %i$ a!ti0(e o%e )ariance eects o$ a oor -rice sche%e $or +ool/  t+o -eriod anal!sis'   %a$ !e8ea(ed t%at "! 0m3(ete 0&0(e$= a ;! 3!i0e $0%eme 0annt be e>3e0ted t %a8e an& $i2niK0ant e7e0t u3n t%e mean (e8e( " eit%e! 2!9e!$ in0me ! " !e0ei3t$ "!m 0mme!0ia( $a(e$ "= in t%i$ $tud&= 9(1 He 2i8e$ t%e !ea$n t%at be0au$e " t%e ab$(ute ma2nitude " 0%an2e$ in bt% bu&in2 and $e((in2 3e!id$= a $0%eme ma& be e>3e0ted t %a8e a m!e $ub$tantia( im3a0t u3n t%e 8a!ian0e " bt% 2!9e!$ in0me and " !e0ei3t$ "!m 0mme!0ia( $a(e$1 Hen0e 0n0(udin2= be0au$e t%e 8a!ian0e " t%e in0me " t%e indi8idua( 9( 2!9e! i$ (i?e(& t be 2!eat(& in;uen0ed b& 0%an2e$ in (0a( 0nditin$ (eadin2 t 0%an2e$ in ut3ut and b& 0$t 0%an2e$= an& !edu0tin in t%e 8a!ian0e " t%e a22!e2ate i$ (i?e(& t be "a! (e$$ im3!tant at indi8idua( "a!m (e8e(1 An& in0!ea$e in t%e 8a!ian0e " !e0ei3t$ "!m 0mme!0ia( $a(e$= and %en0e " e>3!t !e0ei8ed " 9( $(d i$ (i?e(& t (ead t an inten$iK0atin " t%e $e8e!it& " 3e!idi0 ba(an0e " 3a&ment 0!i$i$1 .! t%e in0me $t!eam " indi8idua( 9(2!9e! t%e im3a0t " t%e e>te!na( e7e0t ma& 3!edminate= and a $ortiori "! t%e !e$t " t%e e0nm&1 :1 Mana2in2 5uantit&= 5ua(it& and Timin2 in Cane Su2a! P!du0tin/ E> P$t Ma!?etin2 Pe!mit$ ! E> Ante P!du0tin Cnt!a0t$@ andh!arani Patlolla

In t%i$ 3a3e! tit(ed 4ana&in& uantit!, ualit! and Ti%in& in Cane u&ar  Production/ E Post 4ar"etin& Per%its or E nte Production Contracts@ Patlolla andh!arani )*+*F %i2%(i2%t$ t%e i$$ue t%at Su2a! 3!0e$$!$ mu$t 0m3(& 9it% a ;! 3!i0e "! 0ane= but 2u! and ?%and$a!i 3!du0e!$ a!e e>em3t "!m t%e ;! 3!i0e1 T%u$= an& e7e0t " t%e $u2a! 3!0e$$!$ 0%i0e " 3!0u!ement met%d n t%e in0enti8e$ "a0in2 "a!me!$ 9i(( de3end n t%e e>3e0ted 0ane 3!i0e in t%e$e 0m3etin2 un!e2u(ated ma!?et$1 S%e %a$ de8e(3ed a t%e!eti0a( mde( " t%e And%!a P!ade$% 0ane 3!0u!ement ma!?et t%at in0!3!ate$ t%e 28e!nmentmandated ;! 3!i0e 3(i0& t%at a33(ie$ n(& t t%e 0ane u$ed "! $u2a! 3!0e$$in2= and 0m3a!ed t%e 3!0e$$!$ 3!Kt$ unde! t%e 3!babi(i$ti0 e> 3$t 3e!mit $&$tem and e> ante 3!du0tin 0nt!a0t$1  T%e main 0n0(u$in i$ t%at e> 3$t 3e!mit$ 0!eate$ 0m3etitin amn2 t%e "a!me!$ t in0!ea$e 0ane ua(it& t%at b!in2$ %i2%e! 3!Kt$ t t%e 3!0e$$! at t%e e>3en$e " %i2%e! 0$t$ t t%e "a!me!$1 T%i$ %&3t%e$i$ i$ te$ted and nt !e#e0ted u$in2 data

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