Q.Government reduces the GST rate on a good and simultaneously introduces a new subsidy for its producers. Explain how each change separately affects the gap between that good's Market Price value and its Factor Cost value.

Indirect taxes widen the market-price-over-factor-cost gap, while subsidies narrow it — both act through the single Net Indirect Taxes term.

Recall the identity linking the two valuations:

Effect of reducing the GST rate: GST is an indirect tax, so a rate cut directly lowers the Indirect Taxes component of NIT. A smaller NIT means Market Price and Factor Cost values move closer together (the gap $\text{MP} - \text{FC} = NIT$ shrinks).

Effect of introducing a new producer subsidy: a subsidy enters NIT with a negative sign ($NIT = \text{Indirect Taxes} - \text{Subsidies}$), so a larger subsidy further reduces NIT — again narrowing the MP−FC gap, and, if the subsidy is large enough relative to the (now-lower) indirect tax, NIT can turn negative, which would actually make the good's Factor Cost value exceed its Market Price value (since $FC = MP - NIT$ and subtracting a negative number increases the result). …

Treating a subsidy as adding to Net Indirect Taxes rather than subtracting from it; assuming Factor Cost can never exceed Market Price (it c …