Question

You are going to model households consisting of two adults—a man and a woman—and some kids. (While families are increasingly diverse, we are just going to focus on these households.)

The adults split their time however they like between home production and the formal labour market (i.e., working for pay). Let’s assume that households care only about efficiency. (This is a really bad assumption as it means we are ignoring a lot of really important factors like the role of gender norms. We make the assumption anyway for this test.)

Many places have restrictions on all sorts of gatherings. As a result, whether we are talking about educating children or feeding families, we are seeing an increase in home production. We are also seeing a large exodus of women from the formal labour market (either leaving a forpay jobs or not seeking another for-pay job after the loss of a for-pay job).

King Bob, the King of Boblandia, decides to subsidize childcare. King Bob will pay half of whatever the family owes to a childcare provider who is not a member of the household. Explain how this affects opportunity costs and how these changes will affect how household adults allocate their time.

Answer 1

Opportunity cost is the cost of the next best alternative forgone. It is a very important concept in economics and helps in determining various decisions both on a micro as well as a macro level.it arises because of the fundamental law of scarcity where resources are limited and have alternative uses since the wants or desires are endless.

King Bob’s decision to subsidise childcare is solely in the interest of the families of Boblandia.

Since the adults divide between domestic production and working out it necessarily means that the cost of an hour spent else where earning money is the amount of time family lost. The adults may seek to compensate for this loss by either switching to less stressful jobs or employing childcare takers. On a more serious note some of them may even consider leaving the job market and staying at home to look after their families. This could mean a loss of(labour)efficiency especially in case of women leaving their jobs . This trade off could mean a lower workforce in the employment market.

However, on the home front, there is an improvement in efficiency and activities such as quality parenting, children education, health care would improve and this would mean increase in efficiency on an indirect note.

A large number of women leaving the formal employment is also not good, since it actually leads to informalisation of workforce which is not an ideal situation for an economy. It could mean an absurdly informal wage rate, unhealthy working conditions , very low recognition for productivity and so on. This will in turn affect the overall labour productivity of the economy.

However, as a result of King Bob’s subsidy policy, the homemakers can now afford to return to their jobs or seek newer jobs, as the amount of money that they were earlier spending on child care is now sponsored by the King. It could also lead to increase in employment opportunities especially for women , some of whom may want to take up child care as a career. Adults may be able to allocate time in a more efficient manner . The policy in effect means that King Bob has been a just ruler and has considered the marginal social benefit of the decision rather than the marginal social cost. Clearly , the marginal social benefit of the subsidy policy is greater than the marginal social cost. Which clearly leads to allocative efficiency.

The amount allocated to subsidy may have its opportunity costs. It could have been used for more productive purposes like building a port, laying a road , communication, power , and so on. Yet by considering the need of the community and taking a decision in its interests, King Bob has paved the way for optimal allocation and not just productive efficiency.