Opinion: Government grocery stores defy basic economics

A customer shopping in a grocery store in Toronto, Ont. Photo by Joe Raedle/Getty Images files

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Apparently inspired by New York City Mayor Zohran Mamdani, Toronto city council recently passed a motion to look into opening four government-run grocery stores in the city. With food inflation running high in Canada, it’s no surprise that politicians want to respond. But, as economist Milton Friedman liked to say, “there’s no such thing as a free lunch.” Policy choices have costs, even if the costs are not always visible. So we should beware of governments bearing gifts marked “free.”

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According to Statistics Canada, in January the price of 500 grams of bacon varied from $6.52 in Ontario to $8.10 in British Columbia, with prices in all other provinces falling in between. Many factors determine prices — including input costs (raw materials, energy, transportation), what consumers are willing to pay, the availability of alternatives and the degree of competition in the market.

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Could the government sell bacon at $3? Absolutely, but that government discount would simply shift costs, not eliminate them. At the prevailing Ontario price of $6.52, taxpayers would pay the remaining $3.52 somewhere along the way, most likely through Toronto’s city budget. Your tax dollars would pay for someone else’s bacon. City hall might even raise taxes to help pay for it.

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According to research from the Bank of Canada, import costs, energy costs and wages and salaries remain the driving forces behind the increase in grocery prices in Canada. Greed does not make the list, which only stands to reason. As former Obama advisor Jason Furman puts it, blaming high prices on greed is like blaming plane crashes on gravity. Why? Like gravity, greed is ever present: it doesn’t wax and wane. If it did, we’d have to conclude that falling prices were the result of decreasing greed.

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Supply and demand are what determine prices. Continuing the bacon example; if a greedy grocer decided to sell bacon in Toronto at $9, what would happen? Torontonians would go somewhere else for their bacon and the grocer might eventually go out of business.

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Or consider a different hypothetical. If government could magically lower prices on groceries in a costless manner, why stop at grocery stores? Why not have the government sell cars, clothes and smartphones? And why stop at $3? Why not set the prices of these goods to $0?

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Government control of industry has been tried and has failed at virtually every turn. An extensive body of research shows that countries such as Estonia and Poland, which experimented with socialism, experienced extreme scarcity of many goods, lack of consumer choice, corruption, discrimination and lower incomes for workers.

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Canadian governments do all kinds of things that drive up the price of groceries. For example, our government-imposed system of “supply management” adds $300 to $444 a year to the cost of the average Canadian family’s groceries. Other policies, such as Canada’s industrial carbon tax, which raises the price of goods by increasing the costs of inputs, add to upward pressure on prices. So do income taxes, sales taxes, excise taxes and the many different regulations businesses are subject to.