The economic effects of fair trade: A theoretical assessment of welfare consequences

Cecilie Lærke Kröning Mogensen & Charlotte Nielsen

Student thesis: Master thesis


Fairtrade is a niche market within specialised coffee, but the movement has seen signifcant growth since the establishment of the Fairtrade Labelling Organisation in 1997. The initiative to improve conditions for small-scaled producers has various qualities but has also been the target for excessive critique from many academics, studying the effects of Fairtrade. This thesis investigates the effects of Fairtrade from an economic perspective, through an analytical and theoretical assessment. Despite Fairtrade being a highly debated phenomenon, existing literature is limited in respect to economic modelling on the effects and objective fndings. It is therefore the aim of this paper to provide the reader with an objective, economic evaluation of the Fairtrade program, identifying positive aspects and possible shortcomings. In order to become familiar with the environment in which Fairtrade operates, we investigate differences and similarities between the regular coffee market and the market for Fairtrade coffee. It is found that Fairtrade is seeking to account for certain market failures, such as instable coffee prices, unequal power distribution, and lack of access to markets, all compromising conditions for the marginalised producer. In this paper, the economic effects are evaluated from a measure of changes in total welfare, but also the effect on reallocation of welfare to individual groups is analysed. Amongst main fndings, Fairtrade is found to increase Fairtrade producer income. The gain to Fairtrade producers is, however, lower than the loss to regular producers and total welfare to producers is consequently affected adversely. Finally, considering the effect to consumers, there is found an overall welfare loss from Fairtrade. Analysing factor prices reveals a similar outcome, namely an increase in the rental rate to landowners, hereby also beneftting marginalised producers. As a result, workers are faced with unchanged wages and higher prices, lowering their budget constraint. It can be discussed if the poorest are farmers or workers in developing countries. In the latter case, Fairtrade is in fact worsening the conditions for the poorest, by excluding workers in the program, to some extent. Positive impacts of Fairtrade are identifed as increased competition in the market, trough the requirement of cooperative membership, and argued spill over effects to the local society by means of technological advancements and educational improvements. Fairtrade is hereby beneftting the targeted, marginalised producer, but this comes with a cost to others.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages122