This paper presents a simple, general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation. By identifying the pecuniary effects of these externalities that out, the paper simplifies the problem of determining when tax interventions are Pareto improving. The approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto optima. It can also lead to simple tests, based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria. Traditional discussions of externalities have emphasized the distinction between technological externalities, in which the action of one individual or firm directly affects the utility or profit ofanother, and pecuniary externalities, in which one individual's or firm's actions affect another only through effects on prices. While the presence of technological externalities imply, in general, that a competitive equilibrium may not be Pareto efficient, pecuniary externalities hy themselves are not a source of inefficiency. The fact that prices change has, of course important consequences: there are both distributional and allocational effects. But, the distribution effects net out: gains for example, hy firms whose prices increase—are precisely offset by losses—e.g., to individuals who must pay higher prices. And, there are no welfare losses from the allocation effects as long as the price changes involved are small: if firms are maximizing profits and individuals are maximizing utility, both facing prices that correctly refiect opportunity costs, then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations (resulting from any small change in prices) are negligible.