* A tax on a good reduces the welfare of buyers and the elasticities of supply and demand measure how sellers of that good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus—

the sum of consumer surplus, producer surplus, and tax revenue—is called the deadweight loss of the tax.

Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the market below the level that maximizes total surplus. Because much buyers and sellers respond to market conditions, larger elasticities imply larger deadweight losses.