Question

In the 1970s, there was serious concern about the instability of commodity prices. One of the planks of the then-fashionable New International Economic Order was that efforts should be made to stabilize the prices of goods. Consider the following scheme: When the price of rubber is low, an international rubber marketing board (IRMB) would buy up rubber at some reference price and store it; when the price of rubber is above the reference price, the IRMB would sell rubber from its stock.
Use demand and supply diagrams to show that if the price fluctuations are due to variations in demand, this price stabilization will help rubber farmers, but if the price fluctuations are due to variations in supply (i.e. some years there is a good harvest, in other years there is not), then the price stabilization scheme will hurt rubber farmers. [Hint: (i) Draw a supply curve, high and low demand curves, and an average (reference) price, and show what happens to farm revenues. (ii) Draw a demand curve, high and low supply curves, and a reference price.]

Answer 1

in case of demand the price fluctuation will be eliminated because as the price increase is due to more demand as against less supply if the government will release hoarded rubber at that time supply will increase to meet increased demand and the price will again come down. but in case of supply shock or say bad harvest situation the demand for rubber by the authority for hoarding will rase the price further because supply can not be increased.