What is the welfare cost of pollution measured as deadweight loss on a graph?

• A. The rectangle area under the private marginal cost to the social marginal cost.
• B. The triangle between the social marginal cost and private marginal cost curves from the market quantity to the socially optimal quantity.
• C. The total area under the social marginal cost curve up to the socially optimal quantity.
• D. The difference between social marginal benefit and private marginal benefit.

Answer: (B)

Welfare cost from a pollution externality shows up as a deadweight loss because society bears extra costs that the producer does not pay. The market quantity is found where private marginal cost equals private marginal benefit, but the true social optimum is where social marginal cost equals social marginal benefit. Since pollution adds to costs borne by society, the social marginal cost lies above the private marginal cost over the relevant range. The overproduction beyond the socially optimal level creates a loss of total welfare for both consumers and society.

The deadweight loss is represented on the graph by the triangle between the social marginal cost curve and the private marginal cost curve, from the market quantity up to the socially optimal quantity. Each unit produced in that range imposes a larger social cost than the private cost reflected in the price, so the area of this triangle captures the net welfare that is not realized because the externality hasn’t been internalized. If the externality were internalized (for example, via a tax or regulation), production would move to the socially optimal quantity, eliminating this deadweight loss.