Resource Allocation: 

When the government imposes a tax on a previously free market, it distorts resource allocation and reduces total surplus. A given tax surcharge added to the price of each unit of a particular good (gasoline tax, food tax, federal tax) will lower the price received by the seller and increase the price paid by the buyer. In other words, the loss to consumers and producers from the tax is larger than the size of the tax revenue. The deadweight loss from a particular tax depends on how much a given tax reduces the amount that consumers are willing to purchase and producers are willing to supply. Deadweight loss also called excess burden is a pure loss to society. It represents lost value to consumers and producers due to the reduction in the sales of the good, but not captured by government revenue. Reduction in quantity supplied as a result of a tax depends on the elasticity of supply. Generally, the more inelastic the supply, the smaller the reduction in quantity, and the smaller the deadweight loss. The decrease in quantity demanded depends on the elasticity of demand. Generally, if demand is more elastic, the quantity demanded decreases more and the deadweight loss is greater.

For the most part, tax revenue will first increase as taxes increase but as the gross price keeps rising, the quantity decreases more and more. Eventually, the tax revenue will also begin to decrease. The more inelastic the demand, the slower the tax revenue falls. This helps to explain why governments often put taxes on goods in inelastic demand like tobacco and gasoline. Overall, taxes on specific items will influence people's behavior by inducing them away from the goods that are taxed, increase revenue for the government to spend, making those who receive the expenditures better off, while also creating a dead weight loss.