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?

Answer 1

Answer

a. With subsidy provided to the parents for the child care the demand for the child care will increase . As a rational consumer with the decrease in price of the product the demand for the product will increase.

As a supplier or the producer with increasing demand the supply of more child care units will increase as the producer will be subsidized by the government resulting in no losses to the child care and with increasing demand the profits will increase.

With increasing demand in the field of child care the attraction of other competitors will increase and investment will be done in this field as entry and exit is easy in perfect competition resulting in increasing and expanding market in the field of child care .

b. There are various reasons that may effect the demand for the child care services some of them can be consumer behaviour some parents mindset have that there child would not be treated property in the service resulting in the self parenting whereas the difference in services and quality of the service might effects the demand for the child care .