Fallowing with green fertilizer can benefit agricultural ecosystem services (AES). Farmers in Taiwan do not implement fallow practices and plant green fertilizer because the current subsidy level (46,000 NT$ per ha) is too low to manage fallowing. This paper defines the objective of government agriculture policy or the farmer's objective as maximization of farm productivity, approximated to the value of social welfare and AES. Farms, which do not follow proper fallowing practices, often have poorly maintained fallow land or left farmland abandoned. This results in negative environmental consequences such as cutworm infestations in abandoned land, which in turn can affect crops in adjacent farmlands. The objectives of this study are twofold. First, it determines the proper fallowing subsidy based on the concept of payment for ecosystem services to entice more farmers to participate in fallowing. Second, it simulates the benefit of planting green manure in fallow land to the supply of AES based on the rate of farmers who are willing to participate in fallow land practices and essential parameters that can affect soil fertility change. The approach involves a series of interviews and a developed empirical model. The value of AES when the rate of farmer participation is 100% represents a 1.5% increase in AES (448,317,000 NT$) over the value at the current participation rate of 14%. This study further concludes that the appropriate fallowing subsidy has a large positive impact on AES and social welfare (e. g., benefit from food and biofuel supplies) and is seen as a basis of ecological governance for sustainable agro-ecosystems. © 2011 The Author(s).