What would be causing the rash around my 2y old daughter's mouth?

Perioral dermatitis: Children are often seen to suffer from perioral dermatitis. In children, the disease is caused by a number of factors like cosmetics, drugs and many other physical factors. Doctors normally use anti-inflammatory agents to cure the disease. In severe cases, this is treated by anti-acne medicines.

Saliva or irritant: Saliva contains many chemicals, including enzymes, which start the digestive process. When it repeatedly comes in contact with the skin it can lead to irritation and a rash. It is common for children to lick around their lips, leading to irritation. Due to the irritation, they lick to make it briefly feel better, worsening the rash. Use some type of lip balm or vaseline to keep saliva off the skin.