We provide a new approach for assessing the cost effectiveness of green payment schemes. We allow for complementary, supplementary
and competitive relationships between agricultural production and non-marketed ecosystem services generation. Our theoretical
model distinguishes three theoretical cases depending on the minimum level of the non-marketed ecosystem services. These cases
are empirically investigated using a flexible transformation function and farm-level panel data from the UK. We find that
the biophysical connections between the non-marketed ecosystem services and market activities have important implications
for marginal costs.