Final answer:
The presence of an external cost in a free market typically results in deadweight loss by causing the overproduction of the good, leading to an inefficient allocation of resources and a reduction in the total social surplus.
Step-by-step explanation:
The presence of an external cost in a free market such as an environmental externality leads to a deadweight loss because it causes an overproduction of the good (option b). When social and environmental costs are not included in the price of a product, the market outcome doesn't reflect the true cost to society. This mispricing results in a quantity of production that is higher than what is socially optimum. This overproduction in turn causes a deadweight loss, which is an economic inefficiency where both the producer and consumer surpluses can potentially be higher without the external cost.Furthermore, deadweight loss is the reduction in total surplus (the sum of consumer surplus, producer surplus, and any tax revenue) that occurs when a market produces at an inefficient quantity. In this scenario, because non-private costs like environmental damage are ignored, the market price is too low, and too much of the good is produced and consumed, leading to negative impacts such as pollution that are not properly accounted for in the market price. Deadweight loss represents a loss to society because it is like money thrown away that benefits no one.