The deadweight loss from a market with a negative externality is best described as the area between which curves?

• A. The supply and demand curves from 0 to market quantity
• B. The demand and marginal social cost curves from quantity produced to the socially optimal quantity
• C. The demand and marginal private cost curves
• D. The marginal revenue and marginal cost curves

Answer: (B)

In a market with a negative externality, the social cost of producing a unit is higher than the private cost faced by producers, so the marginal social cost curve lies above the private cost (supply) curve. The market clears where marginal benefit equals private cost, but the socially efficient quantity is where marginal benefit equals marginal social cost. Because MSC > MPC, the market quantity is too high relative to the social optimum. The deadweight loss is the lost welfare from producing too many units, and it shows up as the area between the marginal benefit (demand) curve and the marginal social cost curve over the range from the socially optimal quantity up to the market quantity (the quantity actually produced). That's why the best description is the area between the demand and marginal social cost curves from the produced quantity to the socially optimal quantity.