Pareto Improving Taxes
We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that cause prices to adjust and markets to reclear at diﬀerent levels of individual consumption. The argument can be extended to economies with strategic interactions, incomplete asset markets or asymmetric information. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities.
Geanakoplos, John and Polemarchakis, Heracles M., "Pareto Improving Taxes" (2006). Cowles Foundation Discussion Papers. 1868.