Market Price vs Factor Cost measures:-The difference in these two measures is on account of 'indirect taxes' and 'subsidies':-(i) Indirect taxes:-The term 'market price' means the price which the buyers pay to the production units (sellers). The sellers pay a part of this market price as 'indirect taxes' to the government.All taxes levied on production like sales tax, excise duties, octroi etc. are called 'indirect taxes'. These are called 'indirect' because these taxes are levied on the sellers but shifted on the buyers by the sellers. so these are indirectly paid by the buyers. These taxes are paid by the sellers to the government. It also means that the entire market price, that a seller gets, is not available for distribution as incomes among the factors of production.(ii) Subsidies:-In contrast to indirect taxes, subsidies are the financial help given by the government to the production units for selling the products at lower prices. Such help is given in case of those selected commodities whose use the government wants to encourage. If there was no subsidy the consumer may not buy at all or buy less because of high prices. subsidies are the additional receipts, other than the market price, available to the production unit for distribution among the factors of production.By subtracting indirect taxes from and adding subsidies to the net value added at market price we get value added at factor cost.NVAfc = NVAmp - indirect taxes + subsidies.
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