What does deadweight loss in a market with negative externalities illustrate about social efficiency?

Deadweight loss occurs when a market is not operating at its most efficient level, especially in the presence of negative externalities, which are costs that affect third parties who are not involved in the transaction. For example, if a factory pollutes the air while producing goods, the pollution affects the health of nearby residents, creating costs that are not reflected in the price of the factory's products. This means that the factory produces more than what is socially optimal, leading to overproduction and a loss of overall welfare in society. The deadweight loss illustrates that the market fails to account for these external costs, resulting in an inefficient allocation of resources. To achieve social efficiency, the market needs to internalize these externalities, often through regulation or taxes, so that the true costs are reflected in the price.