Advantages of MBIs

There are several advantages of economic instruments such as:

i) These are efficient in allocation of resources;

ii) They provide incentives for innovations in clean technology;

iii) They are more appropriate when policy emphasis is shifted towards a preventive measure,

iv) They can be an important source of revenue for the government.

In fact, the MBIs are considered to provide 'double dividend', in the sense that they control pollution on the one hand, and generate revenue on the other. The revenue generated through MBIs can further be utilized for environmental protection.

In order to achieve the objectives, MBIs use the market system to evolve two kinds of policy measures such as

i) Administered price, and

ii) Administered market.

In the case of administered price, existing price of polluting good is modified through policy measures to include the social cost of environmental degradation. In this situation obviously, environmental valuation quires special significance in advocating the administered price concept. Hence, administered price either creates price or modifies the existing price to reflect the environmental impact. Similarly, administered market creates a market for environmental pollution, which did not exist before. Tradable permits are the best example for this concept as it creates market for 'pollution abatement' (that is, removal of pollution) through emission trading. The flexibility of MBIs is reflected through selection of appropriate technology for pollution control which minimises cost of compliance but, without any interference of the regulatory authorities.