SEED Working Paper 2: Putting theory into practice: market failure and market based instruments (MBIs)

Whitten SM, Coggan A, Reeson A, Gorddard R. 2007. Putting theory into practice: market failure and market based instruments (MBIs). Working Paper 2 in the Socio-Economics and the Environment in Discussion CSIRO Working Paper Series Number 2007-02. May 2007. ISSN 1834-5638. 46 pp.

The Socio-Economics and the Environment in Discussion (SEED) CSIRO Working Paper Series aims to bring together environmental socio-economic research from across CSIRO.

Summary

This paper addresses how the use of market-based instruments (MBIs) to provide and protect ecosystem services has gained significant attention in Australia.

Despite their popularity, MBIs are not appropriate for the provision of all ecosystem services.

Rather, MBIs must be carefully designed given the ecosystem service outcomes desired, while meeting the needs of participants.

In this paper we detail the importance of a robust theoretical structure to underpin the selection and design of an MBI.

In particular, we demonstrate the role of identifying and analysing the nature of the market failures present, and their implications for instrument design.

Our conclusions are illustrated in this paper using several regional MBI case studies.

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