A model is developed that derives optimal pollution levels and determines the welfare economics of pollution reduction, differentiating between abatement and output reduction. It is suitable to analyze alternative policy instruments aimed to reduce external costs of agricultural production. The model is applied to the U.S. corn sector and we simulate the effects of stylized environmental policies for pesticide use on social welfare and environmental quality. The simulation results indicate that across policy scenarios, fairly modest reductions in output may induce significant gains in social welfare and environmental quality.