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On the Efficiency of Fair Trade

Mark Hayes
Review of Social Economy
Vol. 64, No. 4 (DECEMBER 2006), pp. 447-468
Published by: Taylor & Francis, Ltd.
Stable URL: http://www.jstor.org/stable/29770384
Page Count: 22
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On the Efficiency of Fair Trade
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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.

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