Fair-trade products such as coffee, tea, chocolate, honey, sugar, bananas etc. are commonly found on the shelves of supermarkets here in Finland. For those unacquainted with fair-trade, let me explain that fair-trade products cost more than their “conventional” counterpart. This higher price or price premium is paid by the consumer in exchange of the promise by the producer to pay a higher, “fair” price to the local producers and/or to pay a higher, “fair” wage to its workers (for more see http://www.fairtrade.org.uk/ ).
Standing is the aisle of the supermarket I ponder :should I buy fair-trade tee or the “conventional” one? What impact may an increased demand of fair-trade products have? For an interesting discussion see the Tyler Cowen’s post on Marginal Revolution
Here is an extract:
“ To make the best possible case for fair trade, I will assume the promise of good treatment is credible. Let’s say the supermarket has some market power and would have liked to price discriminate on coffee sales. Now you can buy either normal coffee or fair trade coffee, and the richer, more conscientious people are willing to pay more for the latter. Some people can be charged lower prices, while others pay higher prices. Fair trade will likely increase coffee output, relative to a world with no fair trade. Profits will go up. But what happens to input prices? Will wages of Rwandan coffee producers rise? It depends on the alternative to market segregation. It is possible that if only a single kind of coffee can be sold, the market would opt for the more expensive coffee, involving better treatment of all workers. Even if you don’t expect this today, it might happen in a few years’ time. If McDonald’s can improve the treatment of all the chickens it buys, maybe Starbucks or some other force will force the coffee sector to clean up its act. So development optimists should be suspicious of fair trade. It could diminish long-run general progress by giving the conscientious an outlet for their charity. By splitting up the market, we are institutionalizing especially poor treatment for one class of workers. Furthermore the high profits from price discrimination imply that producers will be keen to continue such segregation rather than end it.”