From Wikipedia:
The use of PTFE tape in tapered pipe threads performs a lubricating function, which more easily allows the threads to be screwed together, to the point of deformation, which is what creates the seal.
Uses
Thread tape is appropriate for use on tapered threads, where the sealing force is a wedge action. Parallel threads may not seal effectively with or without tape, as they are intended to be sealed by a gasket.
Thread seal tape is most commonly found in the color white and is used in plumbing applications, but it is also available in various colors. White PTFE is single density, yellow is double density and pink is triple density. It is often used to correspond to color coded pipelines (US, Canada, Australia and New Zealand: yellow for natural gas, green for oxygen, etc.). These color-codes for thread sealing tape were introduced by Bill Bentley of Unasco Pty Ltd in the 1970s.
White – used on NPT threads up to 3/8 inch
Yellow – used on NPT threads 1/2 inch to 2 inch, often labeled "gas tape"
Pink – used on NPT threads 1/2 inch to 2 inch
Green – oil-free PTFE used on oxygen lines and some specific medical gasses
Copper – contains copper granules and is certified as a thread lubricant but not a sealer