AbstractThis chapter reports the results from an optimization-simulation model used to illustrate the potential impacts of local and national policies to encourage sustainable land use. The empirical focus is on the Manupali watershed in the Philippines. Simulation results indicate that restrictions on vegetable growing in the study area reduce farm- and area-weighted income levels by approximately 15% over 10 years, and reduce downstream loads by up to 37% from base levels. Soil conservation, combined with a lump sum transfer payment, is somewhat more effective in reducing erosion and associated agricultural externalities, but at a cost to the government of approximately 391 pesos/ha per year. Simulation results suggest that a 20% tax on vegetable production is insufficient to dramatically alter land use patterns. Households shift land use somewhat to avoid taxes, leading to modest reductions in agricultural externalities. Combining the tax with a subsidy to soil conservation provides stronger environmental benefits, but reduces household welfare. In general, the study finds that economy-environment trade-offs are difficult to avoid.