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.

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

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

Answer 1

As a result of the imposition of subsidy in the childcare market , the price in the market will ho below the equlibrium price. This will lead to the increase in the consumer surplus , decrease in the producer surplus. On the wider view , the demand will be more than supply and shortage will persist.

If the demand for the childcare in the market has not increased as a result of the subsidy , this suggests that the demand for the childcare is inelastic and hence the decrease in the price to consumer through subsidy will not increase the demand.