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Economic and environmental linkages between two parallel agricultural systems, one upstream and another downstream, are examined. Panel data collected in the Philippine province of Palawan are used to demonstrate how labor market linkages influence decisions impacting local forests and watersheds. Using these data as a point of departure, the paper assesses
whether efficiency based criteria can be used to justify the redistribution of productivity gains between two agricultural sectors. To do this, a dynamic, two-sector model of an agricultural watershed is used to study the evolution and impact of an agricultural externality. Attention focuses on the interplay between externalities generated by the extensive upstream sector and labor productivity in an input intensive downstream sector. A key feature of the model is that labor productivity and labor demand downstream are influenced by externalities generated upstream. Production of the downstream externality, in turn, is influenced by wage employment opportunities downstream. Time paths of equilibrium wages are derived. The analysis shows how natural processes and economic interactions among socioeconomic groups influence the benefits of agricultural intensification. Interventions to minimize tradeoffs and achieve sustainable outcomes are explored.