In a competitive market for a noise-generating home remodeling service, the socially optimal quantity is where MSB equals MSC. The deadweight loss is represented by which area?

• A. The triangle between the market quantity and the social optimum under the demand and supply boundaries
• B. The rectangle under the price line
• C. The entire area under the demand curve
• D. The rectangle between price and marginal cost from 0 to market quantity

Answer: (A)

Deadweight loss shows the welfare that is lost because the market isn’t producing the socially optimal quantity. The socially optimal point is where the marginal social benefit equals the marginal social cost. In this situation, the market quantity falls short of that point, so there’s additional net social value to be gained by producing more up to the optimum. Graphically, that loss is the triangle formed between the marginal social benefit curve (the demand curve) and the marginal social cost curve (the supply curve) over the range from the market quantity up to the socially optimal quantity. The area sits between those two curves between Qm and Q*, representing the net benefit that would be realized if production moved toward the optimum. The other areas described don’t capture this welfare loss: a rectangle under the price line misses the gap between MSB and MSC; the entire area under the demand curve is total benefit, not the forgone gain; and a rectangle between price and marginal cost from 0 to Qm isn’t the efficiency loss from producing up to the social optimum.