It is expected that replacement of all existing taxes on good X by the proposed single Goods and Services Tax (GST) will bring down overall tax on good X substantially. Explain its likely chain of effects on price and quantity of good X. Use diagram.

It is expected that replacement of all existing taxes on good X by the

1.	It is expected that replacement of all existing taxes on good X by the proposed single Goods and Services Tax (GST) will bring down overall tax on good X substantially. Explain its likely chain of effects on price and quantity of good X. Use diagram.
Answer» Solution :With DECREASE in overall taxes, keeping other factors constant, TOTAL supply in the market willl increase due to reduction in the cost of production. It will LEAD to EXCESS supply. This leads to COMPETITION among sellers, which reduces the price. Fall in price leads to decrease in supply and rise in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is an increase in supply only, equilibrium quantity will rise, but equilibrium price will fall.