Assess the possible advantages and disadvantages of using a buffer stock scheme to control the price of an industrial raw material.
It is often argued that buffer stock schemes should be used to control the prices of industrial raw materials such as nickel and tin.
The major advantage to having a buffer stock of important raw materials is that it will protect industries from fluctuations in the prices of the materials. When prices are left to be determined by supply and demand, they can fluctuate significantly. Such fluctuations can be bad for firms because they make it very difficult for firms to plan. Therefore, keeping the buffer stock makes it easier for firms to know what their costs will be and to plan accordingly. This helps the firms and, thereby, helps the larger economy.
On the other hand, maintaining such buffer stocks imposes costs on the taxpayers. The government has to pay to obtain and store the stocks. This is not free. In addition, by doing this, the government is in essence subsidizing some industries. It is using government money to support the industries that use that particular raw material. Economic theory suggests that subsidies can result in a misallocation of resources. Subsidies artificially raise the supply of the thing that is being subsidized. This is, in economic terms, inefficient.