Fair Trade - Is It Really Fair?

Tomas Konecny and Jan Myslivecek

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: One of the arguments against the Fair Trade scheme is that the guaranteed minimum price tends to depress world prices and thus the incomes of non-participating farmers (e.g. The Economist, 2006). We develop a model that distinguishes between the impact of the introduction of a Fair Trade market per se and the effect of minimum price policies given that a Fair Trade market actually exists. The model suggests that the claims against Fair Trade might not be correct. The introduction of a Fair Trade market may increase the incomes of both participating and non-participating farmers. The minimum contracting price as part of Fair Trade standards, however, precludes the full realization of the program’s potential benefits. The minimum price also paradoxically increases the profits of the middlemen whose local monopsony power the Fair Trade scheme originally aimed to retrench. Furthermore, the total surplus generated by Fair Trade cooperatives declines as the guaranteed price increases.

Keywords: Certification; regulation; price setting; coffee; Fair Trade; monopsony (search for similar items in EconPapers)
JEL-codes: D18 D21 D43 D45 D71 J51 Q17 Q56 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-agr, nep-int and nep-reg
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