John Proctor's use of sarcasm in this quotation is intended to expose the utter absurdity of the witch-craze that holds the town of Salem in its vice-like grip. He's being confronted by Parris in court over the existence—or otherwise—of poppets, or little dolls, that are supposed to have been used by Elizabeth Proctor to cast an evil spell on Abigail Williams.

John maintains that neither Mary Warren nor anyone else has ever seen any such poppets in his house. Parris replies that they could've been hidden somewhere. That's when John makes the sarcastic quip about the dragon with five legs. This mythical creature has the same status as the devil dolls: it doesn't exist. But the absence of any hard evidence makes no difference whatsoever to Parris and the other witch-hunters. He's determined to root out every last trace of witchcraft, no matter how flimsy the "evidence" may be.

The literary device used in the quote "There might also be a dragon with five legs in my house, but no one has ever seen it" is verbal irony. More specifically, the device is sarcasm.

Sarcasm is considered verbal irony. Verbal irony is not only known as when a person says or writes one thing and means another, but also (in regards to sarcasm) as an expression where sneering, scorning, or jesting is done in order to show personal disapproval in the guise of praise of a person, a situation or thing.

Therefore, Proctor (in Act III) is being sarcastic through his use of verbal irony. Readers know that there is no five legged dragon in his home. He is simply saying it to make a point.