Fair Trade. Fair trade guarantees that farmers receive a fair price, that is, a price that is above market equilibrium. Farmers must meet certain conditions like not using child labour and avoiding environmental degradation.
Benefits of Fair Trade
- Higher prices. Farmers receive a higher price so they make more revenue and profit. Farmers’ income will be higher so they can afford more goods and services and increase their living standards.
- Reduce fluctuations. Farmers receive a guaranteed price for a given quantity so there is more certainty. Thus, it is easier to plan and invest.
- Diversification. Farmers can diversify into different goods for example bananas, coffee, chocolate, tea and clothes. Diversification allows farmers to reduce risk and stabilize their incomes.
- Development projects. Money from fair trade is invested in local communities in areas like healthcare, education, infrastructure and organic farming. So living standards should rise.
Costs of Fair Trade
- High price. Consumers must pay high prices so consumer surplus falls. Moreover, supermarkets receive a large part of the premium, roughly 10% of the premium trickles down to actual farmers.
- Poor quality. A high guaranteed price may disincentivize farmers from producing high quality goods. So quality suffers and consumer welfare falls.
- Non-Fair Trade farmers. Farmers who do not produce for fair trade may suffer lower demand and thus lower income. The most vulnerable farmers may be those who do not produce for fair trade, these are the farmers who require more protection and better prices.