Fig. 3. Depictions of two alternative scenarios for payments for ecosystem services (PES) as incentive-based negotiations or as government controlled payments. a) Under this scenario, the motivational driver for the transaction would be higher because service providers would be in the best position to negotiate based on demand and supply. This results in lower internal transaction costs (TCs). However, the costs of having many potential service providers and beneficiaries, developing contracts, as well as the technical support needed for fair and individualized trades would tend to inflate external transaction costs. b) In government-financed schemes, well-resourced governments can act to procure the provision of ecosystem services for the sake of public interest through subsidy payments. These programs can be implemented even in the absence of well-defined property rights, because governments can use a combination of regulatory and voluntary manoeuvres to encourage transactions. This administrative influence would tend to reduce external costs of mobilizing actors, negotiating and implementing contracts. However, the ambiguity in property rights and the dual role of government as intermediary and ‘buyer’ encourages principal-agent conflicts and rent-seeking behavior. In this case, the motivational driver for transactions would be lower, and hence internal transaction costs higher. Consequently, overall transaction costs could conceivably be of comparable size in both scenarios unless government shifts its role to an enabler of negotiations governed at the collective level in reducing both internal and external transaction costs (Xiaoyun et al. 2006).