Common forests in developing countries are valuable sources of raw material supplies, employment and income generation, particularly for low income households. This paper looks at the effect on income and employment when common forest resources have external policies that constrain their use. Using a mixed-integer linear programming model, this study examines the impacts of conservation-oriented community forest policies in Nepal on three household income groups. The results showed that current community forest policies, which focus on environmental outcomes through forest use restriction for environment conservation and timber production, result in a large reduction in employment and income of the poorest households and largely explain the recent increase in poverty of rural areas.