Draw a standard supply and demand diagram for widgets, and indicate the equilibrium price and output.

a. Assuming that the production of widgets generates external costs, illustrate the effect of the producer being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output.
b. If instead of generating external costs, widget production generates external benefits, illustrate the effect of the producer being given a subsidy equal to the external benefits generated, and indicate the equilibriumoutput.

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