It should be up to business what it charges for its goods; if it decides to charge less than the cost price, it must have a market-based reason to do so, and it is not the place of government to intervene. It is well-known that consumers focus on the prices of a few staple goods, such as bread, milk, baked beans, etc. So it is rational for retailers with high fixed costs (in wages, rents, power etc.) to set the prices for these key products very low, and even make a loss on selling them, because it will entice more shoppers into their stores. These consumers will also buy other products on which the store does make a profit, and overall sales volumes and profits will rise.

The use of heavily discounted loss-leaders is good for shoppers, especially low-income consumers, who are most appreciative of a bargain that will help them stretch their limited budget. Customers are not stupid but instead canny consumers who are well able to see through the marketing ploys of the big retailers. Often price-conscious shoppers will stock up on the most heavily discounted items, but then go elsewhere for the rest of their shop. On the other hand, attempts in countries like France to regulate retailers have just resulted in protection for the existing firms that dominate the marketplace, and in a lack of competition, which drives up the cost of the weekly groceries for everyone. The same items can cost 30% more in France, where loss leading is banned, than in Germany where it is not and discount stores flourish¹. Prohibiting this strategy will hurt consumers.
¹: Economist, "Purchasing-power disparity: French shoppers want lower prices, but not more competition," May 15, 2008.

By requiring retailers to sell items at least at cost level, the government is creating an artificial price floor, which will cause prices to rise and create a net loss for society. Basic economics explains that artificial price floors upset the free market, costing a net economic loss for society, which will eventually be paid by all sectors involved.

The harm that prohibiting loss leaders causes to prices is well documented. According to a study by the French newspaper La Tribune, a basket of identical items costs 30% more in France than it does in Germany, partly because of the ban on loss leaders¹. In fact, this is the very reason why Ireland repealed its loss leaders ban. The Minister for Enterprise, Trade & Employment said at the time, "The single most important reason for getting rid of the [law] is that it has kept prices of groceries in Ireland at an artificially high level." Indeed, a study published in the British Food Journal concluded that the Irish law had caused prices to rise, and a separate study came to the same conclusion regarding France's loss leader prohibition. More generally, a report from the American Anti-Trust Institute shows that throughout history, such price laws have typically raised prices to consumers.
¹Economist. "Purchasing-power disparity: French shoppers want lower prices, but not more competition." May 15, 2008.

Retailers find themselves all the time with stock that they need to unload, that nobody is buying. This is especially a concern with items that have a sell-by date after which they may not be sold and so become worthless. In such a situation, selling below cost price is economically rational, as it means that the retailer realises some money on their stock rather than none at all. Visit any open-air market at 3.00 p.m. and you will see traders slashing the prices of unsold perishable goods for just this reason. If a retailer is going to sell an item below price level, it might as well use that item as a marketing device. Can you imagine the same market trader slashing his prices, but not shouting them to passersby? Sometimes retailers need to sell items below the price level, and they should be allowed to market them cleverly in order to make up for some of the loss in revenue.