This study investigates the optimal agricultural land use allocation and nitrogen application to a representative Japanese farm. The site-specific nature of numerous agri-environmental issues necessitates analysis at a disaggregated level in order to capture the underlying heterogeneity of agricultural productivity and environmental sensitivity across different parcels of land. This study adopts an integrated approach—a decision-making economic model for representative farms is combined with a stylized site-specific biophysical model, which quantifies the impact of different policy instruments on agricultural production practices and on multiple environmental effects. This model estimates the government budget outlays and social welfare, which require monetary valuation of environmental effects as well as of crop production. In addition to several agri-environmental policy scenarios, this study investigates the impact of the rice production adjustment policy, wherein a rice production quota is allocated to each region on the basis of the sales records for the previous two years. According to the simulation results, there is greater increase in social welfare when farmers are paid in order to reduce chemical fertilizer applications rather than by levying a nitrogen tax. Regarding carbon sequestration, the modelling exercise indicates that an agrienvironmental payment depending on the level of application of organic fertilizer (manure) is preferable; however, the social welfare derived by payments on the basis of the application of a minimum organic matter, which may avoid increasing the fiscal budget burden (on account of the increased application of organic matter on paddy fields), is higher than that derived by unit payments depending on the level of application of organic matter. The relaxation of the rice production quota results in an increase in social welfare. This integrated model approach is subject to limitations with respect to the data, model parameters, as well as economic and biophysical relationships. However, this approach is a valuable tool for enabling policy makers to design and implement effective and efficient policies.