Price based instruments, rights based instruments and market friction instruments are three types of market based instruments applicable for the case situation of the Esk and Macquarie basins. The definitions of a market based instrument as presented in the OECD are one that addresses the issues of environmental externalities in the market. The externalities are usually considered as some form of unintentional side effect that happens to the environment because of a human activity (Stavins, 2003). For example, in the South Esk catchment region, it is observed that there has been extensive amount of agriculture being practiced.
Agriculture is indeed necessary and must be enhanced to provide for food for the locals and for other business purposes (Lopez, 1997; Lankoski and Ollikainen, 2003). However, the extensive way in which agriculture has been practiced for instance has led to the disappearance of the original native vegetation. Native vegetation is indigenous plants that play a vital part in maintaining the ecosystem and services within the area. When indigenous plants like these are not able to thrive, then they can have adverse effects on the ecosystem (Bennear and Stavins, 2007).
These forms of externalities affect even people that are not directly involved in the activity causing the externality and it is for this purpose that they are brought under the study of environmental economics. They are studies with respect to the monetary impact they influence. Environmental economics is the branch under economics where the relationship between the economy and environment is studied under context. To assess environmental economics relations and as for offsetting environmental costs, market based instruments are necessary. In the context of natural capital assets management, the following market based instruments are applicable.