MBIs seek to address the market failure of externalities (such as pollution) by incorporating the external cost of production or consumption activities through taxes or charges on processes or products, or by creating property rights and facilitating the establishment of a proxy market for the use of environmental services.
Market-based instruments can be implemented systematically, across an economy or region, across economic sectors, or by environmental medium (e.g. water).
An argument against permits is that formalising emission rights is effectively giving people a license to pollute, which is believed to be socially unacceptable.
Command and control regulatory instruments include emissions standards, process/equipment specifications, limits on input/output/discharges, requirements to disclose information, and audits.
[3] Empirical studies have shown the opposite; external price changes can induce innovation as companies are forced to address the market failure of under-investment.
However, command and control approaches may be beneficial as a starting point, when regulators are faced with a significant problem yet have too little information to support a market-based instrument.
[5] Thereafter, beginning with the proposal of the acid rain allowance market, environmental advocates have supported the use of trading in a variety of contexts.