a.

Statement of Problem
The steps that a government should take to control the onion prices in the long run.

b. i. DD-SS factors
Onions are consumed by people of all income levels and it has become an almost essential
part of daily consumption. Thus a little change in the price of onions does not has much effect
on the demand. But in the long run if the prices continue to rise then the people resort to
substitutes of onions like cabbage or pumpkin puree. Supply factors in short run are
environmental causes like drought, flood, etc. Due to this the production goes down
significantly and thus pushing up the prices. In the long run government policies like
Essential Commodities Act and improving storage facilities by constructing new and
advanced cold storages and upgrading the existing ones can improve the supply by reducing
the wastage.

b. ii. Role of speculations

With the rise in demand-supply ratio, the sellers, in order to make more profits, try to affect
the demand by falsely speculating the prices of onions. In addition to speculation, they also
hoard large quantities of onions to sell it once the prices increase. As a result of the
speculation, consumers start buying onions in large quantities fearing a rise in price which
results in further shortage of stock in the market. Due to the shortage, the price starts
increasing, and once the prices reach a good point, the seller start releasing the hoarded stock
to gain maximum profit.

b. iii. Market structures

The market structure of seller should ideally be that of a perfect competition as there are
multiple buyers and multiple sellers in the market with homogeneous products. However, in
the current scenario the number of sellers are limited which gives the farmers limited
bargaining power. This leads to the sellers earning high profits whereas the farmers are
getting poor price for their produce. The sellers also resort to anti-competitive practices like
collusion and decide the prices for onions.There are no restrictions that help in putting a price
ceiling on the prices of onions.

iv. Government intervention and imperfections

The market structure of onion in India is that of a semi-regulated one. The government has
set a minimum support price for farmers as well as the minimum export price. This helps
farmer in getting fair price for their produce even when there is large produce in the season.
But the government cannot purchase and store onions because of lack of storage units and
thus does not provide support prices for onions. Because there is a shortage of government
storage facilities, there are fluctuations in the price of onions. The government also tries to
restrict the import of onions in order to ensure fair prices to farmers.

v. Case of price ceilings or floors and how market for onion get cleared
vi. Minimum export prices & beneficiaries
As India is a major producer of onions, its supply can influence the world onion prices. The
government fixes minimum export prices in order to provide lucrative prices to the farmers,
encourage the export of onions and maximize Indias foreign exchange earnings.
In a normal supply situation, the minimum export price is fixed above the market clearing
price in the domestic market but below that prevailing in the world market. An increase in
export prices above the world market price makes the exports more expensive in the
international market, thus reducing the demand for exported onions in the global market. This
helps increase the supply in the domestic market. The reverse holds true when the minimum
export price is lowered. To ensure a smooth domestic supply and to moderate fluctuations in
domestic onion prices, the minimum export prices are fine-tuned every month, taking into
account, crop prospects, market trends, expenses involved, freight charges, etc.

As per the case, the outbreak of the fatal diseases was reported in kharif season and it was
expected the the yield would be low and prices would or. Anticipating this, the government
should have sharply increased the minimum export prices as soon as it became apparent that
there would be a supply shortage. But the response of the government in this front was very
late in coming. To control the soaring prices, on December 21,2010, the government started
implementing measures to discourage exports. The government more than doubled the
minimum export prices to $1200 a ton from $500 a ton, making onions more expensive in the
international market and thus discouraging exports.
vii. Govt. subsidies, storage costs and long-term stability in onion prices
As onions are highly perishable, the conventional methods of storage can result in large
losses, due to weight loss, sprouting and rotting of bulbs. The country requires scientifically
constructed cold storage facilities, which as per the Maharashtra State Agricultural Marketing
Board, can cost around Rs. 6000 per mt storage capacity (excluding the cost of land). The
country requires an additional storage capacity of around 12 lakh tonnes and modernization
of 8 lakh tonnes capacity of existing units(National Bank for Agriculture & Rural
Development, 2000). Since wholesale traders store onions in a traditional & unscientific
manner, the supply becomes limited in the subsequent months and prices rise steeply and
rapidly, leading to dissatisfaction among consumers as well as farmers. Subsidising onion
price in supply shortage is a short run solution for the problem.Government is already
incurring 30% losses, which puts tremendous burden on taxpayers. Government should think
about long term benefits and invest more into infrastructure of cold and more sophisticated
storage plants for onions as well as perishable goods. So, long run solution of supply side
problems setting up storage capacity is the most appropriate solution.