Many instruments can be used to manage behaviors to achieve environmental objectives. These include economic, technological, legal and moral suasion mechanisms, all of which establish positive or negative incentives for environmental-related behaviors. Market-based instruments are those that utilize economic incentives through processes that either explicitly mimic markets or explicitly alter market conditions as means of achieving environmental objectives and allow for some flexibility in how those objectives are met. Markets rely on clearly established property rights and clear terms for trade. Market-mimicking instruments would include tradable permit systems, or other methods that establish tradable property rights or remove barriers for trading. Instruments that alter market conditions directly would include imposition or removal of taxes or subsidies that change cost or demand conditions, or "Green Product" designations that change demand conditions. While other instruments also have economic incentive effects, such as expected liabilities or fines, market-based instruments are designed to have more straightforward effects on the demand and supply conditions facing individuals and enterprises, and may allow more flexibility in achieving environmental objectives than mandatory or restrictive instruments, such as technological mandates.
Stephen Farber (Lead Author);Tom Tietenberg (Topic Editor) "Market-based instrument". In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). [First published in the Encyclopedia of Earth June 12, 2006; Last revised Date June 12, 2006; Retrieved May 25, 2013 <http://www.eoearth.org/article/Market-based_instrument>