Grocery stores aren't evenly distributed throughout the city, though, and there are neighborhoods were either there is no store at all nearby, or the store that exists has poor quality and high prices. In those locations, the dynamic of a city-owned store undercutting a "normal" store isn't really going to apply since there isn't really a "normal" store in the area.

So much, of course, depends on the execution -- a crappy city store won't be a help to anyone -- but the concept isn't inherently bad on its face.