Categories of MBIs
In below Table, we have mentioned certain market-based instruments - both direct and indirect. The direct instruments, viz effluent charges, tradable permits and deposit refund schemes, are imposed on the polluting activity itself. On the other hand, indirect instruments, as you can see from Table, are imposed on inputs used for production of the polluting good. The MBIs can be broadly put under seven categories on the basis of the type of economic instruments. These are
Table: Taxonomy of Market-based Instruments
Taxes and user charges have the advantage that they reduce the compliance cost of attaining a set target thereby enhancing economy wide performance. The disadvantage with taxes and charges, however, is that it is politically difficult to raise them to optimal level. Subsidies and soft loans/grants on pollution abatement inputs are highly popular both in developed and developing countries. There is the danger of dead-weight loss (defined as the difference between the monetary values of what the government loses and what the beneficiaries gain due to the subsidy) largely due to high costs relative to benefits.