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Abstract
We provide a new approach for assessing the cost of marginal ecosystem changes and the
effectiveness of agri-environmental schemes. The approach is based on a theoretical and
empirical analysis of the bio-economic production interactions between marketed outputs and
non-marketed ecosystem services 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 double counting. 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 data for 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 flexible transformation
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. A change in the composition
of the ecosystem services output would have very different implications for individual farms.