Negative Externalities in Day Care: Optimal Tax Policy Response

Michael Lundholm () and Henry Ohlsson

No 68, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Systematic pediatric evidence shows that the morbidity rates for children in day care are increasing in the group size.Sick children are usually cared for at home by parents. This creates a negative externality of parents' labor force participation. The social optimum implies lower group size than the non--intervention market equilibrium. We study the optimal tax policy. The cost of labor force participation should be increased. This can be done by either or both a tax on day care services and a home care allowance. The cost of providing day care should be decreased by a subsidy to entrepreneurs running day care centers. This policy will decrease the group size. It is, however, not necessarily the case that this will decrease labor force participation.

Keywords: negative externalities; infections; day care centers; optimal taxation; Pigouvian taxes (search for similar items in EconPapers)
JEL-codes: D10 D62 H23 I12 J13 J21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2002-04-09
New Economics Papers: this item is included in nep-ltv, nep-mic and nep-pbe
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