This study quantifies the welfare changes in potato trade liberalisation in Sri Lanka incorporating long-term social cost of soil erosion into a multi-period market simulation model. Seven alternative crops were considered for studying long-term land use changes induced by potato trade liberalisation. On-site cost of soil erosion was incorporated in the model through a dynamic soil depth crop yield function and cumulative off-site costs were deducted in calculating net welfare changes associated with land use changes induced by potato trade liberalisation. The results show that gain in consumer surplus is much higher than loss in producer surplus, government revenue and environmental cost. Thus, findings show that trade liberalisation is welfare improving. With regard to the impact of trade liberalisation on environment, the findings are however, non-conclusive. Depending on the empirical setting, trade liberalisation may induce environmentally friendly or unfriendly land use changes. Some environmental policies may be necessary in conjunction with trade liberalisation as it may not necessarily induce environmentally friendly land use changes.