On the efficiency of fair trade

On the efficiency of fair trade
Author: Mark Hayes a
Affiliation:
a Durham Business School, University of Durham, UK
DOI: 10.1080/00346760601024419
Publication Frequency: 4 issues per year
Published in: Review of Social Economy, Volume 64, Issue 4 December 2006 , pages 447 - 468
Subject: Economics;
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Abstract
This paper uses competitive equilibrium theory to analyze the economic efficiency of international "fair trade" between ethical consumers and low-income producers. The main analytical innovations are the reconsideration of the labor supply decision in a state of Keynesian involuntary unemployment as a choice between work and, not leisure, but inferior production activities; and the application of Pigou and Robinson's theory of employer monopsony, leading to a focus on the "local fair trade organization", which has a similar effect to a labor union or minimum wage in eliminating monopsony rents. A price premium is found neither necessary nor sufficient for fair trade, and in a state of involuntary unemployment a premium does not lead to inefficient allocation. The conclusion is that fair trade improves welfare by strengthening competition for labor, and should be encouraged as a complementary element of an enlightened trade liberalization policy.
Keywords: fair trade; efficiency; involuntary unemployment; monopsony
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