RESEARCH PAPER NO. 891

MISSING ENVIRONMENTAL MARKETS AND THE DESIGN OF "MARKET BASED INSTRUMENTS"

BY

PETER BARDSLEY

DECEMBER 2003

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

Market failure is pervasive in the environmental sector, and naturally occurring markets are, in many cases, unlikely to produce socially optimal environmental outcomes. Despite this, the case for using "market based instruments" has recently become popular in the Australian environmental policy debate. The purpose of this paper is to survey some of the broad issues that arise in this debate. What do we mean by market based instruments, and what is the conceptual foundation for their use? What contribution can they make to Australian environmental policy? What needs to be done to improve policy development and implementation, in order to use these new instruments effectively?

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