Decades of nutrient pollution have caused water quality to decline in the nationally iconic Te Arawa (Rotorua) lakes in New Zealand. Pastoral agriculture is a major nutrient source, and therefore this degradation represents an external environmental cost to intensive farming. This cost is borne by the wider community, and a major publically funded remediation programme is now under way. This article describes the range of actions being taken to reduce nutrient loads from internal (lake bed sediments) and external (primarily diffuse) sources in the lake catchments. The high economic cost and uncertain efficacy of engineering-based actions to reduce internal nutrient loads is highlighted. Major changes to land management practices to control diffuse nutrient pollution are required throughout New Zealand if the need for costly and lengthy remediation programmes elsewhere is to be avoided. More action to educate farmers and the public about eutrophication issues, development and enforcement of environmental standards, and further consideration of the use of market-based instruments are proposed as ways to correct the current market failure.