The second major cause of market failure is the existence of externalities

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. Read more