"Fair Trade," Market Failures, and (the Absence of) Institutions

Andrew Samuel, Fred W. Derrick and Charles Scott

Review of Social Economy, 2014, vol. 72, issue 2, 209-232

Abstract: This paper presents an analysis of Fair Trade using a general equilibrium model of an economy where externalities are present and where the institutional or legal framework needed to regulate these externalities may be weak. Weak institutions and externalities are common in the developing world, where Fair Trade is targeted, making perfect competition models inappropriate measures of the value of Fair Trade. Members of Fair Trade cooperatives are required to adopt sustainable production methods, and not employ other socially harmful practices such as child-labor. Thus, Fair Trade organizations can serve as a complement to the existing weak institutions in the economy, creating incentives for entrepreneurs to move from the informal to the formal sector. Specifically, the analysis confirms that in many cases an increase in the Fair Trade premium can reduce the overall level of harmful activities, even from those producers who are not Fair Trade certified, and thereby raise welfare.

Date: 2014
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DOI: 10.1080/00346764.2014.882705

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