The Greater Sierra Vista Area Chamber of Commerce recently launched its campaign to encourage residents to shop locally. This gives rise to the question: What, if any, are the benefits of shopping locally?

One would be hard-pressed to find an economist who would unqualifiedly endorse shopping locally. If asked whether residents should shop locally, most economists would probably respond with the standard economist answer: “It depends.”

Economics is the study of the allocation of scarce resources among infinite possible wants and needs. Understanding that resources are limited and wants and needs are not, and that people have choices, economic reasoning seeks to promote choices that maximize the fulfillment of wants and needs. So if asked whether people should shop locally, an economist might respond that people should shop in the manner that maximizes utility; or, in other words, the manner that allows them to satisfy the greatest number of wants and needs within the limits of their income.

A principle that sometimes clouds economic reasoning and is covered in the early chapters of many economics textbooks is the fallacy of composition. The fallacy occurs when we mistakenly believe that what is true for the part is true for the whole. Shopping locally benefits local economies, without a doubt. Local businesses thrive, jobs are created, tax revenue remains local, and costs are lowered through increased economies of scale for local businesses.

But what if everyone, everywhere were to shop locally? The result for the overall economy would probably not be favorable. Competition would be limited, which would lead to higher prices and lower-quality output. The mix of goods and services available to any particular consumer would be less than in an expanded marketplace. Overall, there would be less satisfaction of society’s wants and needs.

Consider this thought experiment: Imagine you were to rely solely on your own household to produce and supply everything you need. How many of your wants and needs would you be able to satisfy? Would you have a house, car, clothing, or even morning coffee? Now, expand the market area to your neighborhood, then to your city, then countywide, statewide, nationwide, and worldwide. You may have sensed that as the market area expands, you are able to satisfy a greater number of wants and needs. This is why most economists tend to be diehard supporters of international trade.

So economic reasoning tells us we should shop at the locations that allow us to maximize the satisfaction of our wants and needs. Most often, this means we must do some sort of cost comparisons.

A common mistake in analyzing costs is to look only at prices, since these are the most obvious and visible costs. But to accurately compare costs, we must look beyond the immediate prices and uncover the hidden costs. Anyone who has taken an economics course in high school or college is probably familiar with the saying, “there’s no such thing as a free lunch.” This phrase is an acknowledgment that all things have costs, even if they appear free, and that costs are often hidden. Economists spend a good deal of time searching for hidden costs.

  One obvious cost, and one that has become more and more obvious in recent months, is the price of gasoline. When we choose to shop further away from home, this means we must pay the cost of traveling to and from our shopping destination, and this cost must be accounted for in cost comparisons.

We must also consider opportunity costs. These are the costs associated with foregoing one activity for another. For example, if someone were to travel from Sierra Vista to Tucson in search of lower prices, the shopper can expect to spend about three hours on the road roundtrip. What is that time worth and what other activities must be foregone to make the trip? One way of determining the opportunity cost is to estimate one’s hourly wage or salary, and multiply that figure by the time required to shop at a location further from home.

Another hidden cost is sales tax. For example, in Sierra Vista the total state, county, and city retail sales tax rate is 7.85 percent; in Tucson, the rate is 8.1 percent. So for each $1,000 spent in Tucson, the shopper will pay an extra $2.50. It’s a relatively small amount, but one that must be taken into consideration.

A common error in comparing prices between different areas is looking at prices of only one or a small number of items, and assuming the price differentials apply to all prices. For example, the price of coffee at a store in Tucson might be $1 less than at a store in Sierra Vista. This might lead the shopper to believe that prices generally are lower in Tucson than in Sierra Vista. This conclusion, however, would be incorrect. According to the ACCRA Cost of Living Index, the most widely used index to compare the cost of living of different areas across the nation, prices of miscellaneous goods and services in Tucson were about 8.9 percent higher than in Cochise County as of the first quarter of 2008. So while shoppers may pay lower prices on certain items in Tucson, on average they’ll pay about 8.9 percent more.

Grocery items, on the other hand, are about 1.3 percent lower in Tucson than in Cochise County. Here, the price of gas plays a large role. To capture the cost of gasoline, if your car gets 25 miles to the gallon, you’ll have to spend nearly $1,700 per grocery shopping trip if you choose to drive from Sierra Vista to Tucson to shop for groceries. And this takes into account that Sierra Vista taxes food sales, while Tucson does not.

Other hidden costs associated with not shopping locally are more difficult to quantify. When residents shop locally, more economic activity is generated locally. This means more jobs are created, which lowers the area’s unemployment rate. Lower unemployment rates generally mean lower crime and reduced incidents of domestic violence, strained family relationships, drug and alcohol abuse, mental and emotional illnesses and conditions, and other ill societal effects associated with higher levels of unemployment. These societal issues also have costs, which must be borne by all members of the community through higher taxes necessary to pay for public services that deal with these issues; and lower quality of life as these problems often affect a wider population than the immediate participants and victims. So shopping locally lowers the cost of providing government services while raising more tax revenue to pay for those services. If local residents choose to shop in Tucson, for example, then the sales tax they pay goes to providing services to Tucson residents. The result is higher tax rates locally, lower levels of public services, or some combination of the two.

So when deciding whether to shop locally, the economically sound advice of shopping wherever one can maximize the satisfaction of one’s wants and needs still applies. However, when comparing costs we must look beyond price tags and look for the hidden costs associated with not shopping locally.

If you have any questions on the economy, please contact the CER at (520) 515-5486 or email us at cer@cochise.edu. Check out the CER’s website at www.cochise.edu/cer.