MARKETED OUTPUTS AND NON-MARKETED ECOSYSTEMS SERVICES

We provide a new approach for assessing the cost of marginal ecosystem changes and theeffectiveness of green payment schemes. The approach is based on a theoretical and empirical analysis of the bio-economic production interactions between marketed outputs and non-marketed ecosystemservices at the micro level. To frame the economic nature of the problem, we employ a generalized joint production model in combination with cost minimization. The generalized joint production framework allows for the consideration of complementary, substitutive and competitive relationships between agricultural production and non-marketed ecosystem services generation and avoids doublecounting. From this theoretical model we distinguish three theoretical cases depending on the imposed minimum acceptable level of the non-marketed ecosystem services. We employ farm level panel datafor the UK to empirically investigate these cases. More specifically, to represent and evaluate the production structure, we estimate first- and second-order elasticities derived from a flexibletransformation function. Results show that the majority of farms produce agricultural output and ecosystem services in a complementary relationship. Generation of multiple ecosystem services on the same farm showed either a substitutive or competitive relationship. Changing the composition of theecosystem services output would have very different implications for individual farms.