Question

Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents who send their child(ren) to childcare. Assume there are no other subsidies in operation in the industry.

a. [10 marks] Examine the effects of this subsidy on consumers, produces and the wider market.

b. [10 marks] Anecdotal evidence suggests that the number of children attending childcare services has NOT increased. How could you explain this?

Use graphs to explain if needed.

Answer 1

Perfectly competitive market is defined as a market where there are several buyers and sellers and basically there is perfect information available about the price of a good in the market. Thus in this case there is perfect information available about the price of childcare and that there is a per unit subsidy.

a. Consumers will send their children for such services as the cost is subsidised and they save money. The number of producers will be the same or increase marginally as more number of parents will try to send in their children for child care services because of the subsidy. The wider market will also benefit because of this and there will be more employment opportunities in this sector.

b. The number of children attending childcare services has not increased because it might be that the quality of service provided after the subsidy was implemented has reduced drastically. Or the economic output has declined which has led to either one of the parent being unemployed which could explain that they have time available to take care of their child and don't want to spend on childcare services.