Economist Thomas Sowell writes in Discrimination and Disparities:
A study titled The Poor Pay More saw the poor in general as “exploited consumers,” taken advantage of by stores located in low-income neighborhoods. (Here are two studies, here and here). This view was echoed in the media, in government and in academic publications. Yet, because many low income neighborhoods are also high-crime neighborhoods, The Poor Pay More committed an all too common error in assuming that the cause of some undesirable outcome can be determined by where the statistical data were collected.
In this case, researchers collected price data in the neighborhood stores. But the causes of those high prices were not the people who posted those prices in the stores. Moreover, while prices were higher in inner-city, low-income neighborhood stores, rates of profit on investments in such stores were not higher than average but lower than average.
For people unaware of these facts, the higher prices may be seen as simply “price gouging” by “greedy” store owners — discriminate against minority neighborhoods. For those who see the situation this way, higher prices may appear to be a problem that the government could solve by imposing price controls, as a Harlem newspaper suggested during the 1960s furor over revelations that “the poor pay more.” But if businesses in these neighborhoods do not recover higher costs of doing business there in the prices they charge, the prospect of having to go out of business is high. There is often a dearth of businesses in low-income, high-crime neighborhoods, which would hardly be the case if there were higher rates of profit being made from the higher prices charged in such neighborhoods.
It may be no consolation to those law-abiding citizens in a high crime neighborhood that the higher prices they have to pay are reimbursing higher costs of doing business where they live. Meanwhile, politicians and local activists have every incentive to claim that the higher prices are due to discrimination, in the sense of Discrimination II, even when in fact the community is simply paying additional costs generated by some residents in that community.
Those local residents who created none of those costs can be victims of those who did, rather than being victims of those who charged the resulting higher prices. This is not just an abstract philosophical point or a matter of semantics. The difference between understanding the source of the higher prices and mistakenly blaming those who charged those prices is the difference between doing things to lessen the problem and doing things likely to make the problem worse by driving more much-needed businesses out of the neighborhood. The difference between Discrimination IB and Discrimination II is not just an academic distinction.
Although higher prices in low-income neighborhoods discussed in the context of racial or ethnic minorities, the same economic consequences have been found where the people in the low-income neighborhoods were white. As the Cincinnati Enquirer often reported: “Residents of eastern Kentucky refer to the higher prices and interest rates common in their area as the hillbilly tax. Among the things that might be done to reduce the burden of unfairness to law-abiding residents of high-crime neighborhoods could be stronger law enforcement by the police and the courts. But, to the extent that the public both inside and outside the affected communities – sees the high prices as Discrimination II against the affected community as a whole, due to bias or antipathy by the larger society, the imposition of stronger law enforcement may be seen as just another imposition of injustice on the affected communities.
In short, whether people believe that higher prices in low income, high-crime neighborhoods are due to Discrimination II or to empirically-based decisions matters in terms of which policies to reduce the unfair burdens on law-abiding residents are politically feasible. Community or ethnic solidarity can be a major obstacle to seeing, believing or responding to the facts.
Crime is not the only reason why prices are higher in many low income neighborhoods. To someone unfamiliar with economics, it may seem strange that a store in a low-income neighborhood can be struggling to survive, while selling a product for a dollar that Walmart is getting rich selling for 75 cents. But the costs of running a business are among the many things that are neither equal nor random. Walmart’s costs are lower in many ways, of which safer locations are just one.
Even if a local store charging a dollar is making 15 cents gross profit per item, while Walmart is making only 10 cents, if Walmart’s inventory turnover rate is three times as high, then in a given time period Walmart is making 30 cents selling that item, while the local store is making 15 cents. Walmart’s inventory turnover rate is in fact higher than that of even some other big box chain stores, and much higher than that of a local neighborhood store, where the same item may sit on the shelf much longer before being sold.
