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 causes prices to adjust and markets to reclear at diﬀerent levels of individual consumption. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities. It shows that policy makers should look for good tax packages that help everybody, rather than thinking taxes must inevitably be bad for some lobby that will oppose them.
Geanakoplos, John and Polemarchakis, Heracles M., "Pareto Improving Taxes" (2008). Cowles Foundation Discussion Papers. 1966.