The Fair Trade initiative attempts to channel charity from consumers to poor producers by increasing prices. Though widely heralded, this effort to create rents in an otherwise competitive market is unlikely to succeed. By analyzing two ways in which the mechanism is undermined by arbitrage: over-certification and quality-invariant pricing. Using data from an association of coffee cooperatives in Central America, arbitrage can be verified on these two margins causes almost complete dissipation of producer rents. This result confirms the presumption that markets are apt to exercise pressure on any system attempting to extend charity via a price distortion.
Paper: The Dissipation of Producer Benefits in a Disequilibrium Market