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Floor pricing of wood in Australia - Essay Example

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Australian wool industry was quite booming during 1950-1951 and during that period Australia was said to be ‘riding on sheep’s back’. But the scenario changed and the wool prices fell drastically and revenues squeezed. In order to stabilize the situation, from 1971 a Wool Deficiency Payments Scheme functioned for two years. But after that within 1974 and 1991 the Australian Wool Corporation (AWC) introduced a minimum reserve price with the aim of stabilizing the future wool price movements. The idea was to purchase wool which did not achieve the agreed floor price and then selling the wool later in times of high demand (Australian Bureau of Statistics n.d.). Floor Pricing & Australian wool industry Floor pricing Sometimes the government may legally fix the minimum price at which the sellers may sell a particular good or service. Such price is known as floor price or the minimum support price. Floor price benefits the supplier of a good or service. Floor price is fixed to assure the producers that they would get a remunerative price for their product. The floor price will motivate the producers to produce more by ensuring that they will get a minimum reasonable price for their product. ...
At the lower price, there will emerge excess demand (=GH), which will push the price back to the equilibrium price OP0, which is higher than the minimum price. To be meaningful, the floor price must be above the equilibrium price. Now suppose the government fixes the floor price at OP2, which is higher

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than the equilibrium price OP0. At this price the suppliers are willing to sell OQ2 quantity of the commodity while the quantity demanded is only OQ1. Thus, a surplus (or excess supply) of Q1Q2 (=KL) emerges (Wilkie 2007). In this connection it can be said that Mr Massy was critical of the scheme adopted by the Australian government. He stated that the floor was fixed to drive up the prices artificially to an unsustainable level which ultimately brought the financial disaster in the Australian agriculture with a stockpile of 4.7 million bales and an industry debt of $2.7 billion (History of wool's reserve price n.d.). In the next segment the downsize of the price floor in the wool market will be described. Disadvantages of the floor price in any market as well as in the wool market The fixing of the floor price causes some disadvantages. The fixing of the minimum price causes a surplus of the commodity. The producers receive a higher price (OP2) than the equilibrium price; the actual quantity bought and sold will fall to OQ1 i.e, lower than the equilibrium price. In this case some producers find it difficult to dispose of their product at the legally fixed minimum support price and they may flout the law and sell the goods at prices below the minimum price set by the government and in order to maintain this minimum price the government generally purchases the surplus stock and which remains unsold at the minimum price. The
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Summary

Floor pricing of wool in Australia Abstract The paper deals with the economic mechanism of imposing floor price in the wool industry in Australia from the period 1974 to 1991 which brought with it severe agricultural financial disaster with reference to the book, Breaking the sheep’s back by Charles Massey a wool grower and merino ram breeder in New South Wales…
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