Markets - Response Failure

Question 1

why is hoarding bad

Answer 1

results in artificial scarcities and raises prices excessively

Question 2

why is hoarding good

Answer 2

neoclassical economists say we can successfully remove food supply crisis by accurately anticipating it

Question 3

why is withholding food from the market likely to increase as price of food increases

Answer 3

• large farmers will withhold their surpluses for speculative purposes, hoping for further price increase
• small farmers store food as precautionary measure against spiralling market prices
• general inflation might reduce willingness of farmers to convert their produce into cash
• if farmers are aiming to meet fixed financial commitments rather than to maximise profits the proportion of a crop which needs to be sold will fall

Question 4

how do demand factors add to problem of hoarding and speculation increasing prices

Answer 4

• price rise initiated by supply failure implies reduced production by farmers then unable to meet subsistence needs and add their demand for food to that for reduced marketed supplies
• if this demand supported by ‘distress sales’ as assets prices likely to be pushed up further
• if crop failure is widespread, or markets are imperfect, there may be further increase in demand for speculative stocks of grain by traders who expect further price rises

Question 5

two issues that contribute to famine via fragmented markets

Answer 5

1) famine related to level of transport and communication networks

2) spatial price differentials in excess of transport costs which represents true failure of the market

Question 6

fragmented markets - role of transport networks

Answer 6

incidence and severity of famines directly related to level of development of transport networks but will not completely eliminate famines

Question 7

fragmented markets - role of transport networks (Dreze 1988)

Answer 7

British India - expansion of railways resulted in greater tendency towards uniformity of prices
- not enough for means to supply region with food, traders need to be attracted to a region by purchasing power
- infrastructure improved by has been uneven
- food taken from rural areas by traders and sold in urban areas, increasing rural food prices
- even where good quality transport systems exist, they’re not always appropriate to needs to rural population

Question 8

fragmented markets - price ripples (seaman and holt 1980)

Answer 8

prices rise in series of ripples around food shortage region as those afflicted migrate to neighbouring markets where food more readily available

Question 9

fragmented markets - price ripples

Answer 9

contradicts neoclassical economists belief that ‘invisible hand’ of market allocation will ensure food supplies move in response to price signals from excess supply to excess demand areas until single price equilibrium is restored
- price ripple hypothesis reflects reality of breakdown of markets and market signals which typically accompanies crop failure in isolated self-provisioning communities

Question 10

price ripple - why does grain not come into famine areas (demand factors)

Answer 10

inequalities in wealth distribution create inflated signals of real effective demand, wealthy exert pressure on food prices, poorest forced out of market

Question 11

price ripple - why does grain not come into famine areas (response factors)

Answer 11

• traders won’t respond as they recognise high prices as illusory
• require costly reorientation of marketing routes
• only few willing to pay high prices

Question 12

combined effect of FAD and FED can explain famine

Answer 12

• FAD famine for those who retained some wealth but unable to convert this into food due to regional shortage and market failure
• FED famine for the poor who were destitute by collapse of their direct and exchange entitlements