Thomas Sowell

Andrew Young's statement that blacks have been "ripped off" by stores run by Jews, Koreans, and Arabs has been rightly criticized and he has apologized. But these irresponsible remarks have wider implications than Andrew Young and wider implications than their political repercussions.

For decades, one of the biggest blind spots of most civil rights "leaders" and "spokesmen" for the black community has been their utter lack of knowledge of economics.

As a purely factual matter, prices do tend to be higher -- and the quality of service and products lower -- in stores in low-income neighborhoods. But the knee-jerk assumption that this represents "exploitation" or "racism" ignores the economics of the situation.

Many of the ghetto stores charging high prices are struggling to survive, while supermarkets in other neighborhoods are very profitable charging lower prices. There are many reasons for this.

The reason least likely to be acknowledged by those who blame the store owners is that crime, shoplifting, vandalism, and riots have raised the costs, both directly and by causing insurance rates and the costs of security to be higher in ghetto neighborhoods.

The costs of delivering goods to small neighborhood stores are also higher than the costs of delivering goods to huge supermarkets. Delivering a hundred cartons of milk to a supermarket is cheaper than delivering ten cartons of milk to each of ten local stores scattered around town.

Selling a customer $50 worth of groceries in a supermarket takes less time than selling ten customers $5 worth of groceries in a little neighborhood store. Faster turnover is one of the keys to a supermarket's lower prices.

A supermarket can prosper with one cent of clear profit on each dollar of sales because that dollar comes back to be re-used again and again in the course of a year.

If the inventory of a supermarket sells out in two weeks, that one cent comes back 26 times in the course of a year. This means that a penny of profit on a dollar from each sale becomes more than a quarter on a dollar annually.

Few local stores can match that. Not only are the delivery and overhead costs of the local store likely to be higher, the slowness with which its inventory turns over means that even higher prices may not fully compensate for such differences.

The cumulative effect of such cost differences is that prices are often higher and at the same time profit rates lower in poor neighborhoods.

One of the factors limiting what a ghetto store can charge is that many ghetto residents already shop in other neighborhoods, when the price savings are enough to cover bus fare or taxi fare.

Every increase in prices risks losing still more customers.

Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

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