Abstract
We study optimal corrective taxation in a large economy where the aggregate action imposes a negative externality. Agents observe a public signal, which the planner also sees, and private signals, which neither the planner nor other agents see. Agents overreact to both by overestimating their precision. The optimal tax closes the gap between equilibrium and the social optimum, and decomposes into the tax rule that would be optimal under rational expectations and a behavioral adjustment. Conventional wisdom, derived from common-belief models, holds that the adjustment should make the tax more sensitive to the public signal. But that logic assumes agents act only on what the planner observes. Once beliefs are dispersed, the adjustment must instead work through the realized aggregate action, and its direct response to the public signal reverses sign.