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Excessive irrigation and nitrogen applications result in substantial nitrate leaching into groundwater in intensively cropped oases in desert areas of Alxa, Inner Mongolia. An integrated modelling approach was developed and applied to compare policy incentives to reduce nitrate leaching. The integrated model consists of a process-based biophysical model, a meta-model, a farm economic model and an assessment of policy incentives. The modelling results show that there are "win-win" opportunities for improving farm profitability and reducing nitrate leaching. We found that 4471 Yuan ha(-1) of farm gross margin could be obtained with a reduction in nitrate leaching of 373 kg ha(-1). Farmers’ lack of knowledge about water and nitrogen in soil, and on crop requirements for water and nitrogen could explain the differences, so that agricultural extension is an appropriate policy incentive for this area. When the economic optimum is obtained reductions in nitrate leaching are not achievable without profit penalties and there is a "trade-off" relationship between farm profitability and groundwater quality protection. The combination of low elasticity of nitrate leaching and large elasticity of farm gross margin against water price increases results in very high costs for reducing nitrate leaching (105.6 Yuan kg(-1)). It is suggested that if the water price increases were coupled with subsidies for adopting nitrate leaching mitigation practices, environmental gains could come at a lower cost. (C) 2009 Elsevier B.V. All rights reserved.