Market-Based Instruments

There is a divergence between private cost and social cost in the case of polluting activities. In order to regulate these activities the CAC approach puts emphasis on imposition of bans and controls. The MBIs, on the other hand, use economic incentives or market stimuli for internalizing the environmental costs. The main aim of the MBIs is creation of a market mechanism where the social cost of pollution will be borne by the polluters.

Thus, the divergence between private cost and social cost will be avoided and polluting goods will be produced at their socially optimum level. The MBIs are developed on the basis of the principles of the market structure, and attempt to remove the distortions emerging out of inefficient use of resources by removal of subsidies and introduction of environmental charges on emission, input and output.