Abstract: Economic agents often take actions that create negative externalities (such as excessive risky lending by banks or overuse of groundwater by

farmers), calling for a Pigouvian tax to align private and social incentives. However, when agents hold distorted beliefs, traditional tax intervention

may not be effective. We study the optimal tax for agents with distorted beliefs. Different from the literature, we study this problem in a strategic

context. It is natural in a strategic context that not all the players share the same beliefs. We show that this dispersion of belief can completely reverse

the policy implication of distorted belief.

Presentations: IMF, Kelley