02 January 2011

Fair Trade

This is a retread of a post from my now defunct LiveJournal


I was reading Bill Whittle the other day and he hit on a simple truth; Fair trade is simply giving something that someone else wants for something you want.  As long as you both get what you want, there is no problem.

If someone asks for more than I am willing to trade for something they have, again no problem.  I don't get what I want because they don't get what they want.

If I offer far more than they would have asked, once again no problem.  We are both getting what we want, they are just getting more than they expected.

If I offer far less than I expect to get the item for, and they accept, no problem.  We both get what we want, I am just getting more than expected.

If I pay far more for something than the previous or next guy, no problem.  There is nothing that says that value is absolute.  And a seller who cranks up the price because I belong to a group I am member of is telling me that they do not want my business.

Problems surface when I demand the item for less than the seller is willing to part with it, or the seller demands more than I am willing to pay and we are forced to make the sale anyway.

Imagine gasoline being $5.75 a gallon and having to buy 30 gallons a week regardless of how much you use.
This is great for the seller if the market value of a gallon of gas is less than $5.75, especially if very few customers buy 30 gallons of gas a week.
This is great for the buyer if the market value of a gallon of gas is more than $5.75 and they use 30 gallons a week.
It is better than ideal if market value of a gallon is more than $5.75 and you use less than 30 gallons, and you can sell your surplus.
It is ideal if the market value is $5.75 and they use 30 gallons a week anyway.
It is neutral if the market value is $5.75 and they use more than 30 gallons a week.
It is less than ideal if market value of a gallon is $5.75 and you use less than 30 gallons, but  you can sell your surplus.
It is less than ideal for the seller if the market value is more than $5.75 a gallon and many customers use more than 30 gallons a week.
It sucks for the seller if the market value is more than $5.75 a gallon, with many customers using more than 30 gallons a week and customers can sell their excesses to each other.
This sucks for the buyer if market value is less than $5.75 and they use less than 30 gallons a week regardless of being able to sell the excess.
This sucks for the buyer regardless of market value if they use less than 30 gallons a week and are not allowed to sell the excess, especially if they use far less than 30 gallons a week.
This sucks for the seller if the market value of a gallon is more than $5.75 and most customers use 30 gallons per week.

And there are other combinations and permutations I have not listed.

Now, if you enter into an agreement to buy 30 gallons a week at $5.75 a gallon for the next year, you have agreed to spend $8,790 and take delivery of 1,560 gallons of gas regardless of whether you can use or store that much (we'll assume that you can afford to spend $172.50 a week).  The person selling the gas has agreed to give you 1,560 gallons of gas for $8,790.  In this arraingement, you are hoping the price of a gallon goes higher than $5.75, and the seller is hoping the price falls below $5.75 because $5.75 is what is going to be spent for this transaction.  If the price goes higher, you can sell your gas for a profit, if it goes lower the seller makes a profit selling to you.  Welcome to the commodities market!

Now, imagine that gas sells for $5.75, but it's only $3.00 at the pump, with the government paying the seller $2.75 on every gallon.  This is a subsidy.  $3 a gallon?  What a deal!  Except, where does the government get $2.75 a gallon?  Your taxes, of course.  This is great if you pay fewer taxes than $2.75 times the gallons of gas you buy.  This sucks if  you pay more taxes than $2.75 times the gallons of gas you buy.  Notice that I said that "gas sells for" and not "gas costs"?  There are several commodities in the US where the price per unit is fixed and the government makes up the difference if the market value is below the fix point, corn for example.  The government pays the difference between the market value of corn and $2.50 a bushel.  So, even if corn is $0.01 a bushel, it sells at $2.50, with the government paying the farmer $2.49 and the buyer paying $0.01.  Why doesn't the buyer have to pay $2.50?  Because if he did, he would buy from overseas where it's still $0.01!  Why not just charge a tarriff on the imported corn?  Because the farmer here can't live on the fair market value his crop produces, so a tarriff would drive him out of business and we'd be buying imported corn anyway.  The question here is: Is it worth it to keep US farmers farming?

Isn't economics fun?

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