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In many cases people voluntarily provide environmental goods and services, even in the apparent absence of incentives. However if supply is insufficient, as is often the case, there is a role for policies to promote additional supply. This is frequently done by introducing formal incentives, such as regulations or payments for ecosystem services. Psychological studies indicate that formal incentives can crowd out the intrinsic motivations which prompt voluntary actions, potentially creating a policy dilemma. We used experimental economics to examine this problem, creating a scenario in which people trade off private income against contributing to a public good. Our results showed that formal institutions (a regulation and competitive tender) crowded out voluntary contributions, with the supply of public good increasing less than anticipated, and in some circumstances actually decreasing. In particular, the introduction of the competitive tender led to a marked increase in self interested behaviour, where previously many people had acted in a pro-social manner. The effects of crowding persisted even after an institution was removed, suggesting that it may be difficult to reverse. Our results indicate that care must be taken when introducing formal institutions, particularly where desired actions are already occurring voluntarily to some extent.