An overview of papers in this special feature is presented, which sets out to interpret agri-environmental policy options within an economic framework. The discussion focuses on the contrast between these policy options, which emphasize positive incentive payments, and environmental policy in the wider economy, where the 'polluter-pays principle' is taken as an influential guideline. It is argued that positive payments are justified where the rural environment is viewed as a by-product of agriculture which remains external to the market system. On the other hand, clearly negative external effects, such as nitrate pollution, are more appropriately dealt with using penalty-based options. More recent analyses which recognize that producers, consumers and government agencies operate in the face of costly and incomplete information show that a more complex structure of incentives, penalties and monitoring mechanisms could have advantages. Many of the options for agri-environmental policy considered here benefit from these advantages.
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