By WeBuyItGreen: promoting green living and fair trade

I recently discovered the following argument made by an international coffee trader on the World Bank's Private Sector Development Blog:

"Fair Trade coffee seeks to raise the price of coffee paid to farmers. In 101 economics, I seem to recall a rise in price tends to stimulate production. With a supply/demand inelastic commodity such as coffee (or cocoa, or sugar) an increase in supply will lead to a disproportionately large fall in price for the rest of the farmers not affiliated to fair trade. Fair? Not in my book."

I thought this an interesting example of how economic theory can be used (perhaps unwittingly) to serve particular interests and distort the truth. The theory is that an increase in prices leads to increased supply because producers want to take advantage of the increased price, so they create more of the product. But coffee is an inelastic commodity, so the demand for fair trade coffee does not create more coffee consumption overall. Rather, the fair trade portion of the market must be taken out of the overall relatively constant pool of existing coffee drinkers. This leads to a drop in demand (and lowers the price) for other producers (in this case farmers who are not affiliated with fair trade), which, the argument goes, is unfair. Sounds reasonable, right? Or is it rationalization?

Not long ago, Starbucks raised the price on a cup of coffee by perhaps 3 to 5 times its previous cost. As predicted in our economic theory, this increased the supply of a Starbucks-type of coffee since many people wanted to jump on the bandwagon and receive the higher price. Hence the explosion of espresso stands across America. But, since coffee is an inelastic commodity, this should not have increased the number of coffee drinkers. Rather, it should have put existing coffee suppliers out of business, which it did. A lot of mom and pop coffee shops could no longer compete with Starbucks.

Now let's consider our international coffee trader's conclusion about fairness. Was it "unfair" for Starbucks to put other coffee shops out of business? Isn't that ordinarily just considered fallout from free market competition? Since people began to prefer espressos, coffee shops across the world had to either offer them or go out of business. So how is fair trade different? The only difference I can see is that in the case of fair trade, consumers prefer a product because it raises the standard of living for its producers rather than because it pleases their taste buds. Doesn't this simply provide an incentive for traditional coffee growers to take advantage of the higher prices by affiliating with fair trade (much like the traditional coffee shop had to switch to espresso)? It seems the height of absurdity to me to maintain that paying four times as much for a cup of coffee because it pleases the palate is fair, but paying a few cents more for a cup because it puts food on someone's table and sends their children to school is "unfair."