Question

Q5 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. Examine the effects of this subsidy on consumers, produces and the wider market.

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

Answer 1

Part A) Effects on :

1. Consumers : Subsidy will reduce the cost of goods for consumer, thus increasing their demand. The demand curve shifts rightwards as a result.

2. Producers : The supply remains constant but with an increased demand, the price for childcare also rises.

3. Wider Market : The subsidy will expand the market as increased demand will attract new market players. Eventually the equilibrium price for the product will also change.

Part B ) Even after subsidies the demand for childcare did not increase, this is because the equilibrium price at which childcare services are being offered are still high for the consumers. The gains offered by subsidy to consumers has not been able to outweigh the high costs associated with subsidies.