This paper presents a general framework for analyzing externalities in economies with incomplete markets and imperfect information. It identifies the pecuniary effects of these externalities that net out, simplifying the determination of when tax interventions are Pareto improving. The approach shows that such interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto efficient. It also leads to simple tests for evaluating the efficacy of tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria. Traditional discussions of externalities distinguish between technological and pecuniary externalities. While technological externalities imply that competitive equilibria may not be Pareto efficient, pecuniary externalities by themselves are not a source of inefficiency. However, they have significant welfare consequences when there are distortions in the economy, such as monopolies, technological externalities, or distorting taxes. The paper argues that distortions in economies with imperfect information and incomplete markets result in real welfare consequences of what would otherwise be viewed as purely pecuniary effects. Thus, economies with incomplete markets and imperfect information are not generally constrained Pareto efficient, and government interventions (e.g., taxes and subsidies) can make everyone better off. The paper develops a general methodology for analyzing externalities and calculating optimal corrective taxes in a general equilibrium context. It applies this methodology to various welfare problems involving imperfect information and incomplete markets, showing that in many cases, Pareto-improving government interventions exist, and the required interventions can be related to certain observable parameters. The paper concludes that economies with incomplete markets and imperfect information are not generally constrained Pareto efficient, and that government interventions can improve welfare. The analysis highlights the importance of considering externalities in the presence of imperfect information and incomplete markets, and provides a framework for evaluating the welfare effects of tax interventions in such contexts.This paper presents a general framework for analyzing externalities in economies with incomplete markets and imperfect information. It identifies the pecuniary effects of these externalities that net out, simplifying the determination of when tax interventions are Pareto improving. The approach shows that such interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto efficient. It also leads to simple tests for evaluating the efficacy of tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria. Traditional discussions of externalities distinguish between technological and pecuniary externalities. While technological externalities imply that competitive equilibria may not be Pareto efficient, pecuniary externalities by themselves are not a source of inefficiency. However, they have significant welfare consequences when there are distortions in the economy, such as monopolies, technological externalities, or distorting taxes. The paper argues that distortions in economies with imperfect information and incomplete markets result in real welfare consequences of what would otherwise be viewed as purely pecuniary effects. Thus, economies with incomplete markets and imperfect information are not generally constrained Pareto efficient, and government interventions (e.g., taxes and subsidies) can make everyone better off. The paper develops a general methodology for analyzing externalities and calculating optimal corrective taxes in a general equilibrium context. It applies this methodology to various welfare problems involving imperfect information and incomplete markets, showing that in many cases, Pareto-improving government interventions exist, and the required interventions can be related to certain observable parameters. The paper concludes that economies with incomplete markets and imperfect information are not generally constrained Pareto efficient, and that government interventions can improve welfare. The analysis highlights the importance of considering externalities in the presence of imperfect information and incomplete markets, and provides a framework for evaluating the welfare effects of tax interventions in such contexts.