Consumer and producer surplus (Consumer and Producer Surplus) add up to total surplus, the whole gain from trading in a market. A competitive market makes that total as large as it can be, as long as nobody outside the deal is affected.
Key idea
Total surplus = consumer surplus + producer surplus = the area between demand and supply, out to the quantity traded. It is largest at the competitive equilibrium $Q^*$. If less (or more) than $Q^*$ is traded, some of it is lost. That lost surplus is the deadweight loss (DWL), a triangle between the curves: $$DWL = \tfrac{1}{2} \times (\text{gap between the curves at } Q) \times |Q^* - Q|.$$
Why it works
For every unit up to $Q^*$, the demand curve (what a buyer would pay) is above the supply curve (what it costs a seller to provide). Trading that unit creates a gain equal to the gap. Stop at a smaller quantity and those gains never happen: no buyer gets them and no seller does. Past $Q^*$, each unit costs more to make than anyone would pay for it, so producing it destroys surplus. Either way the total shrinks by a triangle.
Worked example: Too little traded
In the market $Q_d = 20 - 2P$, $Q_s = -4 + 2P$ (equilibrium 8 units), only 5 units are traded. Find the deadweight loss.
- Demand's height at 5: from $P = 10 - Q/2$, $P = 7.5$. Supply's height at 5: from $P = 2 + Q/2$, $P = 4.5$.
- The gap is $\$7.50 - \$4.50 = \$3$, and the missing units run from 5 to 8.
- $DWL = \tfrac{1}{2} \times 3 \times 3 = \$4.50$.
Answer: \$4.50.
Worked example: Too much traded
Same market, but 10 units are traded. Find the deadweight loss.
- At 10 units, demand's height is \$5 and supply's is \$7: those last 2 units cost more than buyers value them.
- $DWL = \tfrac{1}{2} \times (\$7 - \$5) \times (10 - 8) = \$2$.
Answer: \$2.
Common mistake
Thinking the lost surplus is money someone else collects. A deadweight loss is not a transfer; it's a gain that would have happened and didn't. When surplus moves from buyers to sellers (as with a higher price), it is redistributed, not lost. Check: ask "does anyone receive this area?" If no one does, it's deadweight loss.
"Efficient" here means the total gain is as large as possible. It says nothing about whether the split between buyers and sellers is fair; that's a normative question.