Missing Environmental Markets and the Design of "Market Based Instruments"

Abstract

Market failure is pervasive in the environmental sector, and naturally occurringmarkets are, in many cases, unlikely to produce socially optimal environmentaloutcomes. Despite this, the case for using market based instruments has recentlybecome popular in the Australian environmental policy debate. The purpose of thispaper is to survey some of the broad issues that arise in this debate. What do we meanby market based instruments, and what is the conceptual foundation for their use?What contribution can they make to Australian environmental policy? What needs tobe done to improve policy development and implementation, in order to use these newinstruments effectively?