Economic efficiency requires that social marginal benefits and social margin- al costs be equal at the selected output level-this occurs at quantity Qo, where marginal social cost (MSC) and demand (D) intersect. But because firms do not con- sider the external costs of their output, they choose output level Qe at the intersec- tion of MPC and D. Relative to output level Qo, consumers of the private good. being produced gain surplus equal to area PocaFe (because they get quantity Qe at price Fe rather than quantity Qo at price Po), and producers lose surplus equal to area PocdP, minus area abd (the first area captures the effect of the lower price, the sec- ond the effect of greater output). Those who bear the external costs, however, suf- fer a loss given by the area abce (the area between the market and social supply curves over output difference remember, the vertical distance between the supply the marginal cost). The net loss in social surplus curves represents the external is the area of triangle ace, the algebraic sum of the surplus differences for the con- sumers and producers of the private good and the of the externa This net social surplus loss is simply the deadweight loss due to the overproduction the area between MSC and D from Qo to Qe.) In other words, Pareto efficiency re- quires a reduction in output from the equilibrium level in the market (Qe) to the level at which marginal social costs equal marginal social benefits (Qo)