This Demonstration shows the effect of an excise tax on a perfectly competitive market. When the tax is introduced, the consumer surplus (orange) and producer surplus (blue) shrink, while deadweight loss (purple), the inefficiency caused by the tax, increases. Additionally, the Demonstration shows and calculates the revenue for the government raised by the tax. Of course, this diagram is a representation of what a perfectly competitive market would look like, if such a system existed. The purpose of this simplified program is to introduce students to the basic effects of taxation on the efficiency of a market.
The deadweight loss inefficiency is caused by the fact that there are transactions that are not able to occur due to the tax. In a hypothetical market system free of government intervention, there would be no deadweight loss. Note that the tax takes away both consumer and producer surplus; both parties pay a partial burden of the tax.