Monday, January 01, 2007

Opportunity costs in everything -- single-payer grocery edition 

Dave Downing discusses why groceries cost more in an urban center, and how difficult it is to find supermarkets for the poor who live there. It's really quite simple, and we can do this with a question from Heyne. This is question 14 from the end of the second chapter:
Have you ever noticed how few gasoline stations are to be found in the center of large cities? With such heavy traffic one ought to be able to do an excellent business.
(a) Why are there so few gasoline stations in the center of large cities?
(b) Would it be efficient for city governments, which have the right of eminent domain, to take over a small amount of downtown land in order to provide gasoline stations in areas where the demand is obviously great?
The answer, quite simply, is that the land has higher value in alternative uses. Whenever you see gas stations downtown, they tend to be in very small, constricted spaces. So too with grocery stores. The value of the land is so great in alternative uses that no one can support the rental cost of the land needed to build a supermarket. What land there is to use has high enough rent that food prices in the downtown grocery will be greater. Goods that could easily be bought through a trip to the suburbs will not be sold there, because the higher price would be competed away.

A similar logic would be, why do parking spaces in downtown St. Cloud sell for so much less than those in Minneapolis.

Tim Harford explains this as well in The Undercover Economist. Think of the urban area as a meadowland and the suburbs as scrubland.

UPDATE (1/3): Craig Westover writes a column on this and argues for easier transportation from urban centers to suburbs. That would already exist in a private market if it was beneficial.