We study a one-sector growth model which is standard except for the presence of an externalityin the productionfunction. The set of competitive equilibriais large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochasticregime switching. The efficient allocation is characterizedby constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibriumoutcome. That schedule has two properties: (i) it specifies the tax rateto be an increasingfunction of aggregateemployment,and (ii) earningsaresubsidized when aggregate employment is at its efficient level. The first featureeliminates inefficient, fluctuating equilibria, while the second induces agentsto internalizethe externality.

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