What the Market Will Bear

Strange item by one Shankar Vedantam in the Washington Post today, which apparently ran on page A03: When Immigration Goes Up, Prices Go Down.

Seeing that headline, I expected to read about the labor market. All other things being equal, more immigration means more workers, means more competition for jobs, means lower wages, which in turn may mean lower prices too.

But no. Not at all. Here's how it starts:

Last week, a gallon of gas at an Exxon station in the tony suburb of Bethesda cost $2.99.

At an Exxon station in the less affluent suburb of Wheaton, a gallon cost $2.63 — 36 cents less.

Both Exxon stations are located near a subway line that goes to downtown Washington. Both are in the same county: Montgomery.

Why would the same company charge you 14 percent more for an identical product in one location?

Because it can.

The article goes on to suggest that concentrations of immigrants lower prices. Yes, it's presented as cause and effect:

Immigration, economist Saul Lach recently found, plays a powerful role in holding down prices. For every 1 percent increase in the ratio of immigrants to natives, prices go down by about 0.5 percent, according to Lach's new study about the effects of 200,000 Jews immigrating to Israel from the former Soviet Union in 1990.

It may be that recent immigrants are poorer, and thus are cannier shoppers, and that this causes a downward pressure on prices. But note that the article itself gives as its major example the willingness of immigrants to drive out of their way for cheaper gas (which would suggest the effect might not in fact be localized).

Whatever the circumstances were in Israel, it seems passing strange to assume that direction of causality in Maryland when there's so much reason to suspect it works the other way: low prices attract immigrants more than immigrants cause low prices.

I would have thought that poor people tend to live in neighborhoods where property prices are lower because they can't afford the homes in expensive neighborhoods. And I would have thought that commodity prices like gasoline are lower in poor neighborhoods in part because fixed costs, like rent or property taxes, are lower.

A correlation, even a strong one, is not causation.

(And let's not even start on all the evidence that food prices are higher in very poor neighborhoods because low-cost chain stores won't open there.)

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2 Responses to What the Market Will Bear

  1. I’d assume prices drop where people are poorer, regardless of the cause of their poverty. Poorer people, all things being equal, are going to demand a smaller quantity of a good at a given price compared to richer people. Producers therefore maximize profits by lowering price to increase quantity supplied.

    Fixed costs, at least in simple models, don’t affect price. See http://en.wikipedia.org/wiki/Fixed_cost

  2. Sue Ann says:

    Haveing lived in poverty during my youth and now working as a volunteer in an organization which addresses poverty I can tell you why prices are higher in poor neighborhoods.

    When people can’t “buy” food they steal it. Businesses in “bad” aka poor neighborhoods can’t afford it so they hike up their prices to cover losses. This is not supposition, it’s from what I have experienced. It’s not just food, it’s other goods too. A woman confessed to me in tears that she “stole” a pair of shoes from Walmart for her daughter so the girl could go to school. The shoes cost $4.88 but the woman could not afford it.

    Some goods are lower priced, but not many. What is diminished is the size of the product sold. Poor people can’t buy for the future, the buy for the present and only “enough” which is what they can afford.

    If you live in poverty you don’t buy supersized boxes of Tide, it’s more like standard sized boxes of Xtra laundry detergent, and sometimes when times are bad, it’s even smaller individual sized boxes (or bags) of no name laundry soap. However, those things cost more per ounce/pound because they are not sold in bulk, and the cost per load of using one load laundry soap is not equal to the cost of buying a bulk product.

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