The second major cause of market failure is the existence of externalities
Parents of young children tend to have low incomes relative to their permanent income, but may face borrowing constraints that reduce their ability to pay for high-quality care
The benefits of quality care accrue not just to the parent(s) but also to the child and to society more generally. Parents may take all or part of the benefit to their child into account, but not benefits that are external to the family. Such benefits include lower costs for subsequent schooling (reduced probability of grade retention and special education, for example), future reductions in crime, increased productivity that results in higher productivity for others, payment of higher taxes, and possibly lower costs for social services. Improving child care quality may affect grade school classrooms by increasing the proportion of children in the class who have strong language and cognitive skills. By the same token, poor-quality child care may undermine grade school classrooms by increasing the numbers of children with academic and social deficits. Unsafe and unhealthy child care may result in reduced productivity for others, when parents are absent from their jobs, caring for injured or ill children. Adding these benefits to the parent’s demand for higher-quality care should shift the demand curve for quality care to the right (that is, increase demand for higher-quality care at every price).
Justification for government intervention may also be based on distributional or equality-of-opportunity goals. This may be especially relevant today, in view of the requirement that most low-income single parents work. The core argument here is that if high-quality child care can provide gains in cognitive ability, school readiness, and social behavior, children in low-income families should be given an opportunity to benefit from such experiences just as high-income children benefit. Parents with limited earnings do not have the private means to purchase high-quality child care for their children. Government subsidies are necessary if equal opportunity for high-quality care is to be afforded children in low-income families. The other side of this argument is that if subsidies are not provided, parents with limited incomes will use poor-quality care, including multiple arrangements, which may be detrimental to the safety of their children, ily stress, and may result in children with reduced opportunities.
There are additional issues regarding availability of child care for families with very low incomes and/or unusual and nonflexible hours of work. According to several studies:
A subsidy (or direct provision of care) for children in low-income families could also complement the Earned Income Tax Credit and serve as an employment-related income subsidy (see Council of Economic Advisers, 1997)
Yet only 10 percent of centers and 6 percent of family day care homes reported providing weekend care. Almost half of working-poor parents worked on a rotating or changing schedule, further restricting these families’ child care options to more flexible arrangements made with relatives, friends, and neighbors.
The features of low-wage work appear to promote reliance on multiple providers as a way of patching together child care to cover parents’ nonstandard and shifting work hours (Siegel and Loman, 1991). Meyers added that irregular and unpredictable work schedules led to disruptions in child care for the families in her study of the California GAIN program (Meyers, 1993). Deborah Phillips wrote (1995)
The market failure components argue for government intervention in improving child care. They all lead the authors of this report to believe that the demand for high-quality care is too low. And because demand is too low, compensation is too low, resulting in better-trained providers tending to seek employment in other spheres. This results in a decline in quality unless intervention occurs. Intervention can take many forms.