Suggested Answers of BT2 Revision Package - ASKnLearn

3. Antithesis: success of policy does not just depend on PED / PESAbove analysis assumes other factors constant.In reality, the policy is likely to result in unintended consequences and second-roundeffects which will affect its success in stabilising prices.a. Holding down the price of the good in the country relative to other countries may attract buyers from other (neighbouring) countries Without any policy to restrict foreigners from buying up the supplies in the domestic market or to stop domestic firms from exporting the grains and frozen meat to foreign markets to take advantage of the price differential à arbitrage will reduce the domestic supply, counter-­balancing the govt’s efforts to increase domestic supply by releasing grains and frozen meat from its stockpile à reduce effectiveness of policy (Graph + accompanying explanation) b. An important determinant of success: expectations Releasing of supply from stockpile à may help to calm fears of further price increasesà reduce hoarding à fall in dd, increase in ss by private sellers à help to furthermoderate price increase(Graph + accompanying explanation)4. EvaluationSuccess of policy of releasing ss from stockpile depends very much ona. how much the government is able to release from its stockpile. The larger the size of the stockpile, the stronger the ammunition the government has to fight the price increase. For example, even when the PED of meat is more elastic, the policy can still be effective in bringing down prices if the government can release enough frozen meat from its stockpile, i.e. if the supply increases by a large enough amount, there can still be a substantial reduction in prices. (Graph + accompanying explanation) b. whether the government is able to stem arbitrage e.g. effective enforcement of export bans