Efficiency,quality, and social externalities in the provision of day care: Comparisons of nonprofit and for-profit firms

Efficiency comparisons of nonprofit and for-profit day care centers reveal that, in 1977, production functions of nonprofit and for-profit day care centers were similar. Cost levels were also similar for centers providing identical services. However, on average, nonprofit centers offered costlier services than for-profit centers. In the segment of the industry not subject to federal regulations, nonprofit centers offered services with higher social externalities than for-profit centers. In the federally regulated segment, nonprofit centers offered higher quality services than for-profit centers. Therefore the important difference in economic outcome of nonprofit and for-profit day care centers involved product selection rather than efficiency levels.