On the face of it, it seems very unfair: prices in the inner-city, where people have the least money to spend, are typically higher than in middle-class suburban areas in the same state. Is this an example of corporate exploitation of the poor, or is there another explanation?

<p>Dr. Walter Block, an Austrian economist, wrote about this subject in his 1976 book <i>Defending the Undefendable</i>, and the phenomenon is still with us today. In 2002, the <i>Akron Beacon Journal</i> compared the prices of fifteen nonprescription items at area inner-city and suburban Walgreens and Rite-Aid stores and found that more than one-third of the items at inner-city stores were priced higher than those in the suburbs.

<p>The newspaper was outraged, saying that the data “flew in the face” of the drug-store chains’ promises to “bring fair prices” to the inner-city – promises they made when they begged city planners to “let” them open stores in the heavily regulated ghettos of Akron, Ohio.

<p>”You think because Walgreens is a chain their prices would be the same across the board. That is supposed to be the good thing about chains,” said a local politician.

<p><b>Prices in a Free Market</b>

<p>All businesses charge what the market will bear—the price point at which their profits are maximized. This isn’t the “highest possible price,” for if they tried to charge $100 for a bottle of aspirin, no one would buy. Rather, businesses in the ghetto and in Beverly Hills both charge the price that will lead to the greatest profits for the business. This is how capitalism works.

<p>The real question, therefore, is: what is it about the suburbs that prevents the drug chains from charging higher prices, and what is it about the inner-city that allows them to get away with it?

<p>Well, just as in the ghetto, Walgreens and Rite-Aid charge what the market will bear in the suburbs. The suburbs, evidently, will bear less than the inner city, even though their denizens have more money. Why? If Walgreens and Rite-Aid tried to charge higher prices, their customers would shop at competitors and the businesses would be unsuccessful.

<p>So why don’t competitors charge lower prices in the inner city? After all, Walgreens and Rite-Aid promised to bring “fair prices” to Akron, which obviously means the prices charged by the existing merchants were considered “unfair.” Why doesn’t a new drug store come in and charge “fair” prices and get all of the inner-city’s business?

<p>The answer is that it’s more expensive to do business in the ghetto than in the suburbs. Insurance premiums are higher because there is a greater risk of theft, vandalism and worse. There are greater expenses related to shoplifting and property damage that’s uninsurable. And in order to attract equally qualified employees, the business must pay higher wages. After all, who would want to work in a dangerous environment for the same pay? In reality, of course, the wages paid are usually similar, and a lower-quality of service can be expected.

<p><b>Opportunity Costs and Choices</b>

<p>It could be that Walgreens and Rite-Aid generate larger profit margins from their ghetto stores than from their suburban ones. Thus, an altruist would say that they should lower their prices voluntarily, even though they can get away with charging more. But shouldn’t businesses be compensated more for doing comparatively unpleasant work? If you had the choice of making $10 an hour working in a safe environment or making $11 working in a war-zone, you’d probably take the $1 pay-cut. Maybe you’d work in the dangerous area for $15 or $20, but you would certainly expect to make more for performing unpleasant work, and only you could decide “how much more.” This is what Walgreens and Rite-Aid are doing.

<p>What would be the result of government regulation forcing Walgreens and Rite-Aid to charge equal prices in the suburbs and inner city? Well, they’d either have to raise prices in the suburbs or lower them in the ghetto. If they did the former, they’d lose business to firms that only operated in the suburbs and thus weren’t subject to the regulation. If they did the latter, it would no longer be worth it to remain open in the inner city. Either way, the end result would be the same: Walgreens and Rite-Aid would shut down their inner-city operations. This is exactly what CVS did before them.

<p>CVS was not faced with regulations but merely social pressure, the same kind of social pressure the Akron politicians put on Walgreens and Rite-Aid in 2002. The result of that social pressure is the exact opposite of its intended effect. After all, if people resent Walgreens and Rite-Aid employees for working for corporations they find to be “exploitive,” then that would likely result in employee mistreatment or harassment on the part of customers. In order to keep the employees from quitting, the drug chains would have to pay them higher wages, thus further causing prices to rise. Ultimately, the end result of this kind of social pressure will be for the chains to exit the inner city and leave it to the previous merchants that charged “unfair” prices to begin with.

<p>Economics is a science of definite laws. These laws can no more be subverted by man-made government laws than can the law of gravity. When politicians pass laws that seek to thwart economic laws, the opposite of the intended consequence can be expected.

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