This article develops a theoretical framework for analyzing the social costs and benefits of buffer strip establishment. An empirical simulation model is used to estimate the magnitude of these costs and benefits under conditions characteristic of southern Finland. The model indicates that the current agrienvironmental payment program with mandatory buffer strips and fertilizer use restrictions comes close to the social optimum. Small inefficiencies arise from the fact that the mandatory buffer requirement of the current program is only half of the socially optimal size, and fertilizer use restrictions for most crops are more stringent than those required by the social optimum.