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Market-based instruments (MBIs) are promoted as economically efficient, targeted solutions to otherwise intractable environmental policy problems with additional potential to improve the livelihood security of ecosystem service providers. This paper argues that the effectiveness of MBIs (and the likelihood therefore of sustained environmental and social outcomes) depends on a number of often unacknowledged assumptions about the distribution of benefits arising from ecosystem service provision, the rights and duties associated with resource access, and the fitness for purpose of various policy instruments. These assumptions are illustrated and discussed using The Benefit Flows and Property Rights Matrix. It is argued that the legitimacy of MBIs depends both on the demonstrability of distinct public benefit and of acceptance among the wider community that private resource users ought to be compensated in some way for the provision of that benefit. Effective provision of ecosystem services through a market-mechanism thereafter depends on a range of additional conditions including inter-changeability of supply, scalability, lack of corroboration, adequate information, financial capacity, clarity of property rights, clarity of resource access-related duties and institutional capacity. Meeting these conditions is not simply a matter of appropriate incentive design but of political decision-making, moral judgement and social learning. Failure to recognise these conditions potentially undermines the effectiveness not only of MBIs but of alternative policy measures taken contemporaneously with MBIs such as community-based natural resource management.
