Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 68: Negative Externalities in Day Care: Optimal Tax Policy Response

Michael Lundholm () and Henry Ohlsson
Additional contact information
Michael Lundholm: Departement of Economics, Postal: Stockholm University, SE-106 91 Stockholm
Henry Ohlsson: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG

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

JEL-codes: D10; D62; H23; I12; J13; J21

21 pages, April 9, 2002

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