- Overview of questions
- 1
- 1 (Yes)
- 1 (Answer)
- 2
- 2 (Yes)
- 2 (Answer)
- 3
- 3 (Yes)
- 3 (Answer)
- 4
- 4 (Yes)
- 4 (Answer)
- 5
- 5 (Yes)
- 5 (Answer)
- 6
- 6 (No)
- 7
- 7 (No)
- 7 (No No)
- 7 (No Yes)
- 8
- 8 (Yes)
- 8 (No 1)
- 8 (No 2)
- 9
- 9 (Yes)
- 9 (No)
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Questions
After deciding that an MBI may be an appropriate tool in step 2, the next step is to answer the nine questions in the decision tree. This will enable the NRM manager to create a short list of which types of MBIs may be suitable to the particular situation that is being considered.
The first four questions in the tool are directed towards addressing market failures within existing or associated markets that are affecting the NRM goal. Where these failures exist, market friction MBIs may be sufficient to promote the desired NRM management goal.
In many instances, however, the NRM problem will arise because NRM markets are incomplete or missing. In these circumstances price- or quantity- type MBIs will be needed, and questions five to nine explore the suitability of alternative instruments in these circumstances. Question 5 is focused on instances where some urban or industrial activities are already regulated and there is scope to include the agricultural sector through the use of voluntary mechanisms. Question 6 rules out cases where there is not enough variability in the private costs between land managers of making NRM improvements to warrant an MBI. Question 7 then considers whether there is a willingness to impose liabilities which will lead to opportunities to use market-creation or negative price-based instruments. Question 8 considers whether circumstances are appropriate to consider market creation. Question 9 assesses whether a positive or negative price-based instrument may be more appropriate.
At the end of this process, the NRM manager should be able to generate a short list of potential MBIs that will be suitable for the circumstances they face.
Support to NRM managers to answer the questions in the decision tree is provided through a number of means:
- further information on text that is underlined can be found in the fact sheets; and
- further information for items with a ¤ symbol can be found in the case studies.
Finally, you can access the fact sheets and case studies using the quick links on the right side for further help.
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More information
The first reason for market failure to be explored is where other government policy interventions are having a negative impact on NRM outcomes. For example, an industry assistance program may be prolonging adjustment in an industry and the perpetuation of unsustainable management practices. If these other policies can be reformed to maintain their original policy intent but without the unwanted NRM impacts, then the policy intervention required is to reform the ‘perverse policies’.
Markets may also be impacted by information or other barriers that increase transaction costs in the market and lead to less than optimal NRM outcomes. An example here would be where information on the (potentially) positive NRM outcomes associated with organic produce is not being transmitted to consumers. As a result, prices formed in the market cannot signal back to producers the value being placed on the associated NRM outcomes. In these instances, a market friction MBI can be explored to help the operation of the market and improved NRM outcomes.
Other less common sources of market failure in NRM markets, such as market power, should also be explored.
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Seek to reform
The first reason for market failure to be explored is where other government policy interventions are having a negative impact on NRM outcomes. For example, an industry assistance program may be prolonging adjustment in an industry and the perpetuation of unsustainable management practices. If these other policies can be reformed to maintain their original policy intent but without the unwanted NRM impacts, then the policy intervention required is to reform the ‘perverse policies’.
Markets may also be impacted by information or other barriers that increase transaction costs in the market and lead to less than optimal NRM outcomes. An example here would be where information on the (potentially) positive NRM outcomes associated with organic produce is not being transmitted to consumers. As a result, prices formed in the market cannot signal back to producers the value being placed on the associated NRM outcomes. In these instances, a market friction MBI can be explored to help the operation of the market and improved NRM outcomes.
Other less common sources of market failure in NRM markets, such as market power, should also be explored.
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Seek to reform
The first reason for market failure to be explored is where other government policy interventions are having a negative impact on NRM outcomes. For example, an industry assistance program may be prolonging adjustment in an industry and the perpetuation of unsustainable management practices. If these other policies can be reformed to maintain their original policy intent but without the unwanted NRM impacts, then the policy intervention required is to reform the ‘perverse policies’. Markets may also be impacted by information or other barriers that increase transaction costs in the market and lead to less than optimal NRM outcomes. An example here would be where information on the (potentially) positive NRM outcomes associated with organic produce is not being transmitted to consumers. As a result, prices formed in the market cannot signal back to producers the value being placed on the associated NRM outcomes. In these instances, a market friction MBI can be explored to help the operation of the market and improved NRM outcomes. Other less common sources of market failure in NRM markets, such as market power, should also be explored.
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Question
The first reason for market failure to be explored is where other government policy interventions are having a negative impact on NRM outcomes. For example, an industry assistance program may be prolonging adjustment in an industry and the perpetuation of unsustainable management practices. If these other policies can be reformed to maintain their original policy intent but without the unwanted NRM impacts, then the policy intervention required is to reform the ‘perverse policies’. Markets may also be impacted by information or other barriers that increase transaction costs in the market and lead to less than optimal NRM outcomes. An example here would be where information on the (potentially) positive NRM outcomes associated with organic produce is not being transmitted to consumers. As a result, prices formed in the market cannot signal back to producers the value being placed on the associated NRM outcomes. In these instances, a market friction MBI can be explored to help the operation of the market and improved NRM outcomes. Other less common sources of market failure in NRM markets, such as market power, should also be explored.
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Question
The first reason for market failure to be explored is where other government policy interventions are having a negative impact on NRM outcomes. For example, an industry assistance program may be prolonging adjustment in an industry and the perpetuation of unsustainable management practices. If these other policies can be reformed to maintain their original policy intent but without the unwanted NRM impacts, then the policy intervention required is to reform the ‘perverse policies’. Markets may also be impacted by information or other barriers that increase transaction costs in the market and lead to less than optimal NRM outcomes. An example here would be where information on the (potentially) positive NRM outcomes associated with organic produce is not being transmitted to consumers. As a result, prices formed in the market cannot signal back to producers the value being placed on the associated NRM outcomes. In these instances, a market friction MBI can be explored to help the operation of the market and improved NRM outcomes. Other less common sources of market failure in NRM markets, such as market power, should also be explored.
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More information
Often markets may be incomplete because they do not include all land managers who could positively contribute to a NRM objective. In these circumstances, a sufficient policy response may be to extend the existing market to land managers who can provide the NRM good. An example here is greenhouse gases, where industries may be liable for their discharge of these gases. If land managers can change their management practices to reduce greenhouse gas emissions (or sequester carbon) more cost-effectively than the other liable parties, then changes to the market to facilitate this trade in abatement effort would be beneficial. That is, the greenhouse gas market could be extended to land managers by allowing liable parties to purchase compliance offsets from them.
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Question
Often markets may be incomplete because they do not include all land managers who could positively contribute to a NRM objective. In these circumstances, a sufficient policy response may be to extend the existing market to land managers who can provide the NRM good. An example here is greenhouse gases, where industries may be liable for their discharge of these gases. If land managers can change their management practices to reduce greenhouse gas emissions (or sequester carbon) more cost-effectively than the other liable parties, then changes to the market to facilitate this trade in abatement effort would be beneficial. That is, the greenhouse gas market could be extended to land managers by allowing liable parties to purchase compliance offsets from them.
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More information
Where there is limited variability in NRM management costs, from an economic perspective it is not important who undertakes the changes, and so the use of an MBI to ‘reveal’ low-cost providers is not needed. In these situations simple MBIs, such as a fixed-price grant or subsidy, may provide an easily administered policy option.
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Your MBI outcome
Little benefit from an MBI.
Simple price instrument could be considered. ‡
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More information
Some market-based instruments require liabilities to be imposed; that is, regulation requiring specified firms and land managers to pay charges or to undertake specified actions (with associated costs to them). If government is not willing to impose such liabilities, this limits the types of MBIs that can be used to positive price-based instruments.
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More information
For NRM and environmental goods, workable and cost-effectively administered rights are difficult to design, monitor and enforce. In many instances, NRM goods are a composite of a number of attributes that uniquely make up that good. For example the value of biodiversity is influenced by many factors, including the number of species, location, and understorey structure. It is difficult to clearly define one metric that captures all of these features and the trade-offs between them.
Similarly, there is often a lack of knowledge between the cause and effect of land management and environmental outcomes or consequences. The cost of addressing this knowledge gap can be very large. Without knowing causes and effects it is very difficult to know if a land management action generates or violates a property right. The verifiability of a property right is also made difficult by the fact that the environmental outcomes of land management actions occur over very long periods of time and space, and are difficult to quantify.
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Question
For NRM and environmental goods, workable and cost-effectively administered rights are difficult to design, monitor and enforce. In many instances, NRM goods are a composite of a number of attributes that uniquely make up that good. For example the value of biodiversity is influenced by many factors, including the number of species, location, and understorey structure. It is difficult to clearly define one metric that captures all of these features and the trade-offs between them.
Similarly, there is often a lack of knowledge between the cause and effect of land management and environmental outcomes or consequences. The cost of addressing this knowledge gap can be very large. Without knowing causes and effects it is very difficult to know if a land management action generates or violates a property right. The verifiability of a property right is also made difficult by the fact that the environmental outcomes of land management actions occur over very long periods of time and space, and are difficult to quantify.
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Negative price instruments require liabilities to be placed on all potential contributors to NRM outcomes. This can lead to significant costs in identification, and enforcement where large numbers of land managers are involved and/or where there are significant costs involved in monitoring compliance at each site. In these circumstances positive price instruments may be administratively cheaper as they ‘self-select’ or reveal those who need to make management change. Accordingly, monitoring and enforcement activities are only needed in relation to these land managers.
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