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Abstract
This paper examines the issue of incentive-compatibility within environmental stewardship
schemes where incentive payments to farmers to provide environmental goods and services are
based on foregone agricultural income. The particular focus of the paper is on the role of land
heterogeneity, whether in terms of agricultural value or environmental value, in leading to
divergences between the actual and the socially optimal level of provision of environmental goods
and services. It is shown that such goods and services are systematically over or under-provided
depending on the characteristics of land heterogeneity both within and between landscape regions.
It is therefore concluded that incentive payments should be based on social willingness-to pay for
the provision of environmental goods and services.