Reflection Assignment-3 Submitted By: Gaurav Chaudhary

Graded By: Saagar Chitkara

Grade Assigned:

Q1. Why does the government support MSP? When should the government actively consider
price control? 
Q2. Under what conditions do you believe that WTO stand for a free market is justified?
Q3. Under what conditions, restrictions have to be imposed?

Answer-1
MSP – Minimum Support Price is part of a welfare analysis policy to help producers. The
outcome of the welfare analysis demonstrates that price supports can increase producer surplus,
but in many cases at a large cost to the rest of society which may have lower relevance in
government policy than other benefits. Here I will explain more in detail how MSP is applied by
assuming crop being wheat for this explanation and why it does so.

The quantity of wheat produced by producers depend on support price. Government purchases
the surplus (Q”-Q’) at the price support level to maintain the price support and avoid underground
market.

Welfare Analysis:
1) Consumer Surplus(Initial) = A + B + C
2) Producer Surplus (Initial) = D + E
3) Social Welfare (Initial) = A+B+C+D+E

After Government Support Price

1) Consumer Surplus(Final) = A
2) Producer Surplus (Final) = B +C + D + E +F
3) Government Spending = C + E + F + G + H + I
4) Social Welfare (Final) = Consumer Surplus+ Producer Surplus - Government Spending
=A+B+D–G–H–I
Change in Consumer Surplus = -B – C
Change in Producer Surplus = B + C + F
Change in Government Spending = – C – E – F – G – H – I
Change in Social Welfare = – C – E – G – H – I
Dead Weight Loss = C + E + G + H + I

Why does Government does so?

It is done mainly due to following reasons or scenarios:

1) MSP is used to support middle or lower income farmer which have less choices of what to
grow due to limited capital. As per Niti Aayog report on MSP for agriculture- Small farmers
which constituted 65% of the total farming households earned 60% of their annual income
from agriculture whereas in the case of medium farmers which constituted 19% of the total
farming households, it was 68%. Finally, the large farmers which constituted 16% of the
farmers’ community received 74% of their annual income from the cultivation. In this scenario
MSP is specifically designed to support mainly 25 crops mainly produced by these low or
middle income farmers. It does not provide support for horticulture, vegetables, fruits or
dairy products as famers involved in these are rich farmers.
2) MSP is used when farmers are not well-connected to the markets and do not have
bargaining power. They are at mercy of middlemen and fluctuating market conditions. In
these scenarios MSP helps to secure the smaller farmers. Here social welfare is secondary
to benefit gained by the farmers.
3) MSP is used to help MSME and small farmers adopt new technologies to become more
competitive in market competition. As per Niti Aayog report of Agri MSP-
It was found that 78% of the farmers adopted improved methods of farming such as: high
yielding varieties of seeds, organic manure, chemical fertilizer, pesticides and improved
methods of harvesting, etc. for increasing the production as a result to the MSP declared by
the Government.

When should the government actively consider price control? 

Government need to consider price control when we have issues where basic required
commodities cannot be afforded by society cannot afford it due to income level. To put in
another words when inelastic commodities become elastic due income level , Government
need to intervene. Classic case of this is basic food distributed by Public Distribution system
through ration cards. Here government has price control of limited food quantities to help the
family sleep without empty stomach rather than letting them die.

Another similar case is that of Genetically modified seeds e.g. cotton seeds needed for
agriculture. The government had to intervene in this case as Mahyco Monsanto Biotech by just
changing a mere gene wanted to charge heavily on royalty of seeds , which farmers cannot
afford resulting in 300,000 farmers suicide. Monsanto started to collected royalties from Indian
farmers, pushing up the cotton seed price by about 71,000% (from Rs 5 per kg to Rs 1,600 for
450 gms). This was done all without having a patent on Bt Cotton seed. Post government
intervention prices have been increased but in a controlled rather leaving it to Monopoly of few
genetic companies deciding the prices where there is no competition.

Answer-2 & Answer -3

WTO stand for free market is justified under all conditions apart from those mentioned
below.
 1) Actions taken against dumping (selling at an unfairly low price)
2) subsidies and special “countervailing” duties to offset the subsidies
3) emergency measures to limit imports temporarily, designed to “safeguard” domestic
industries

1) Anti-Dumping : If a company exports a product at a price lower than the price it normally
charges on its own home market, it is said to be “dumping” the product. This could
severely impact domestic industries. In this scenario the exporting country tries to build
up its scale which would further let it reduce its commodity prices in future when volume
increases. Example in this case is CFL bulb in India. Back in 2014 Govt intervened to sell
CFL bulbs to optimize existing power generation by reducing house consumption and
creating buffer for industrial use. In this scenario Govt had tender floated to build 5 crore
CFL bulbs to achieve its mission. This helped to achieve scale needed to compete
against Chinese CFL bulb companies while also helping government meet its power
requirement.
2) Subsidies and countervailing measures: Subsidies provided for commodities from
exporting countries to their industries to help export to other countries need to be
countered. For example if you see china may be dumping cell-phone to certain countries
may be restricting development of those countries cell-phone manufacturing indigenous.
Here countries need to find ways to increase tax in gradual manner so that they could
develop scale in manufacturing as well. For example US has cut down Chinese imports
of certain cell-phone companies due to tax subsidies provided in China.
3) Safeguard Domestic Industries- This is a scenario where Imports are cut down
specifically when certain sectors industries cannot handle competition. For example India
has imposed anti-dumping duty of up to USD 1,559 per tonne on imports of a certain type
of sheet used in solar cell making from China, Malaysia, Saudi Arabia and Thailand for
five years to safeguard domestic players against cheap shipments.

1) https://www.prsindia.org/administrator/uploads/general/1242360972~~final
%20summary_pdf.pdf
2) https://www.livemint.com/industry/agriculture/how-central-government-s-minimum-
support-price-failed-marginal-farmers-1551031226482.html
3) http://agricoop.nic.in/sites/default/files/NCF3%20%281%29.pdf
4) https://www.quora.com/Why-and-how-does-the-Indian-Government-define-minimum-
support-price-MSP-for-crops-Why-cant-farmers-get-good-price-for-their-produce-in-
spite-of-high-food-inflation
5) https://www.financialexpress.com/industry/seed-firms-oppose-price-control-under-
proposed-seed-bill/1766241/
6) https://economictimes.indiatimes.com/news/economy/agriculture/government-to-review-
cotton-seed-price/articleshow/74240990.cms?from=mdr
7) https://www.thehindubusinessline.com/economy/agri-business/seed-lobby-wants-govt-to-
do-away-with-msp-price-control-regime/article29189517.ece
8) https://scroll.in/article/814476/why-the-government-is-right-in-controlling-the-price-of-
monsantos-bt-cotton-seeds
9) https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm
10) https://economictimes.indiatimes.com/news/economy/foreign-trade/india-levies-anti-
dumping-duty-on-solar-cell-component-from-four-
nations/articleshow/68668956.cms#:~:text=India%20has%20imposed%20anti
%2Ddumping,domestic%20players%20against%20cheap%20shipments.