The content of this paper is about the economics of child care provision in Australia. The content analyses an economic case study as posted on the ABC news website where the high cost of managing children at children service centers has been noted.
1 Welfare Implications of Subsidy and Justification of the Subsidy
A subsidy according various sources is any form of support offered by the government to consumers and producers and can either be financial or in any other form. Provision of a government subsidy to any sector has economic as well as welfare implications to both the consumers and producers which in this case are parents and child care center owners. The graph explains to what extent does the government policy can feed through in order to the price of child care in Australia (Early Childhood Education Policies in Asia 2016). The consumers in a market with an inelastic demand curve as shown in the first diagram below benefits greatly from a government subsidy compared to those in a market with relatively elastic demand curve.
When the a market has a perfectly inelastic, consumers which in this case are the parents would have gained more benefits from the Australian government subsidy as the subsidy released is passed onto the parents of the children via a lower prices of the child care services offered by the producers or sellers of child care services (Early Childhood Education Policies in Asia 2016). In situations where the market demand is relatively price elastic, the main implication of a government subsidy is to upsurge the equilibrium quantity being offered in the market which in our case is child care services instead of lowering the market prices as illustrated in figure two of the diagram below.
On the other hand when discussing the welfare implication of a government subsidy other issues apart from the common effect on the quantity and prices should be considered (Early Childhood Education Policies in Asia 2016). The well-fare implication of the subsidy can be well explained through an economic models as in the figure below marked from A-H.
In a free market such as the child care service market in Australia, the regions marked (A&B) combined as one indicates the consumer surplus in the market. This is because the region represents an extra child service which parents using subsidized child care service in Australia enjoy as a benefit. Apart from just indicating the consumer surplus the region indicates the price that parents pay for the child care service which is beyond what they should have paid when the service was not subsidized (Webb 2017). Further, the regions marked C & D as in the diagram comprises of the child care center owners as this region represents the extra benefit the owners of children centers in Australia enjoy from the sales of the service to the parents. The benefits marked by the region C&D indicates what child center owners enjoy far beyond the marginal cost of production. When the consumer surplus and producer surplus are combined together, the total economic value of the two benefits results into social surplus and as indicated above, it is equals to A+B+C+D.
The welfare implication of government subsidizing child care in Australia therefore benefits both parents the consumers and the child care center owners. Parents as indicated below gets the area which is above (Pc) which is the price paid by the parents below their normal valuation for the child care service they receive. This according to the diagram can be found within the model below by summing A+B+C+F+G, from the discussion in relation to the model above, parents’ well-fare are made much better with the government child care subsidy.
The owners of the child centers which in this case are viewed as sellers of the service also have their well-fare made better through government subsidy on the sector. The owners of the child care centers as indicated in the diagram below receives their benefits (Pp) which is given by the supply curve in the figure below. Just as the parents, the owners of the business are made much better off with the government subsidy and this can be figured by summing A+B+C+D in the diagram below.
Economic justification of a subsidy
Government subsidies are in most cases economically justified as they results into much benefit which improves people’s welfare and economic well-being as discussed above. Provision of child care subsidy by Australian government is justifiable economically. With the government subsidizing child care, many working mother are able to secure their jobs leading to many being employed. Government subsidizing child care is therefore economically justified and is more fruitful in a market with an inelastic price demand.
2: Effect of High Wages on Child Care Services
According to the case study the cost of providing child care services are already high even with the government subsidy as well as low wages offered to the child care service providers or people employed at child care service centers. When workers providing child care services are successful with their current wage increment bargains, the cost of providing the child care services to working parents will increase (Webb 2017). The higher the price the lower the demand for a given commodity. With increase in the wages, the prices of child care services in Australia will move higher reducing the number of children being taken to child care centers.
3: Market Failure
The current situation in Australia cannot be viewed as total government failure but as a market failure. Government failure occurs when government interventions to control a market failure. Government failure is in this case would have occurred when the government could have not been fully able to control the market failure. Market failure occurs when the price mechanism cannot allocate the scarce resources with care an efficiency. In this situation, some people in the market benefit by exploiting others. The services provided by these market do not provide satisfactory outcome from the societal point of view as revealed by the case.
4: How the Government Can Respond To Concerns Raised In the Case Study
The controversy surrounding the unfairness, affordability and usage of child services and other commodities considered necessity in Australia can best be solve through enactment of price ceiling policies (Early Childhood Education Policies in Asia 2016). The price ceiling various economic models can be employed by the government to predict the behavior of buyers and control the child care prices (King and Meagher 2009). With application of price ceiling as a policy, parents who are the main buyers of child care services will benefit more as this poly is meant to help increase demand for a given product or service. Conclusion
As discussed above subsidizing services by the government comes as are a result of atrial by the government to control a market failure. Subsidies provided by the government comes with various implication both social and economic s indicated in the content above. The government to ensure that the situation surrounding child care is well solved, should apply the ceiling policy to control the controversy even though child care service center owners may not benefit much.
Early Childhood Education Policies in Asia (2016): Advances in Theory and Practice. https://public.eblib.com/choice/publicfullrecord.aspx?p=4699980.
KING, D., & MEAGHER, G. (2009). Paid care in Australia: politics, profits, practices. Sydney, Sydney University Press.
Link: https://www.abc.net.au/news/2017-09-18/why-is-child-care-so-expensive/8956296 www.abc.net.au/news.[18September2017].
Principles of Microeconomics. Joshua Gans, Stephen King, Martin Byford, and N. Mankiw. 6th ed. South Melbourne, Australia: Cengage Learning Australia Pty Limited, 2015. 571 pp. Chapter Overview
Torii, K., Pilcher, S., and Fox, S. (2017) Australia is still lagging on some aspects of early childhood education. The Conversation, 23 June. Available from www.theconversation.com. [19 September 2017]. Link:
Webb, T. (2017) Why is child care so expensive? ABC News, 18 September. Available from