Buffer stock is created by the government to stabilize the price of a commodity that is subject to price fluctuations.
When demand for a product increases, the price of that product will rise. If a farmer who cultivates this product has already sold all his yield, he will no longer be able to take advantage of the rise in prices.
When supply is low, farmers tend to hold on to their products and wait for prices to increase before selling them off.
To prevent farmers from trying to sell their products at a higher price when they are in limited supply, the government may opt to buy all or part of the crop as soon as it is harvested, so that farmers are not left without money before they can sell their commodities and profit from price increases.
The government can then resell these goods when supply outstrips demand and prices fall.
Final Answer :
The government creates buffer stock when there is a surplus of a commodity.
This allows the government to control the flow of the commodity by regulating its availability to the market.
When there is a buffer stock, producers may be more inclined to reduce their prices to compete with the low prices of the stocks already stored.
Buffer stocks are also used to counter any potential shortages of a commodity.
By creating buffer stocks, the government can ensure that there will be enough of this commodity later on and prevent any shortages from occurring.
Moreover, buffer stocks are also maintained by the government to distribute foodgrains among the poorer sections of society.