Evaluating Agri-Environmental Schemes – The Marginal Costs of Ecosystem Services

We provide a new approach for assessing the cost of marginal ecosystem changes and theeffectiveness of agri-environmental schemes. The approach is based on a theoretical andempirical analysis of the bio-economic production interactions between marketed outputs andnon-marketed ecosystem services at the micro level. To frame the economic nature of theproblem, we employ a generalized joint production model in combination with costminimization. The generalized joint production framework allows for the consideration ofcomplementary, substitutive and competitive relationships between agricultural production andnon-marketed ecosystem services generation and avoids double counting. From this theoreticalmodel we distinguish three theoretical cases depending on the imposed minimum acceptablelevel of the non-marketed ecosystem services. We employ farm level panel data for the UK toempirically investigate these cases. More specifically, to represent and evaluate the productionstructure, we estimate first- and second-order elasticities derived from a flexible transformationfunction. Results show that the majority of farms produce agricultural output and ecosystemservices in a complementary relationship. Generation of multiple ecosystem services on thesame farm showed either a substitutive or competitive relationship. A change in the compositionof the ecosystem services output would have very different implications for individual farms.