Land degradation due to inappropriate agricultural activities, as well as the environmental and social effects associated with these practices, is accelerating in many developing regions of the world. This trend underlines the importance of measuring environmental costs and benefits to improve policy making with respect to land use and agriculture. Using nonmarket valuation techniques, this article estimates the value of environmental services associated with four agricultural land-use systems in the Chittagong Hill Tracts of Bangladesh and compares their relative profitability from private and social perspectives. The financial analysis reveals that annual cash crops are the most profitable short-term land use and agroforestry is the least profitable, with horticulture and farm forestry providing benefits intermediate between these two systems. However, the relatively larger returns from annual cash cropping lead to higher environmental costs such as soil erosion, forfeited carbon sequestration, and biodiversity loss. When the environmental costs are taken into account, annual cash crops appear to be the most costly land-use system, with agroforestry and farm forestry becoming more profitable. The findings demonstrate the tradeoffs and synergies between relatively more environmentally sustainable and harmful land-use practices. Financial incentives to encourage more prudent agricultural activities are needed to transform tradeoffs into synergies. This article examines different financial incentive mechanisms — including payments for environmental services — and makes several policy recommendations.
