Market-Based
Solutions

While legislation is aimed at directly changing the behaviour of polluters by outlawing or limiting certain practices, economic instruments aim to make environmentally damaging behaviour cost more. Under these market-based policies, polluters are not told what to do; rather, they find it expensive to continue in their old ways and they are presented with a choice about how they can change. Usually, economic instruments are used in conjunction with legal measures.

When individuals or firms make decisions about production, consumption and investment, they generally only consider their own costs and benefits, and not environmental or social consequences (externalities). The pollution they create does not usually influence their decisions. Laws force the polluter to take notice of these external costs by prescribing limits to what can be discharged or emitted. Economic instruments are supposed to make these external costs part of the polluter's decision, by adding a charge or by in some way providing a monetary incentive for considering the environmental and social costs.