Threats to dugong survival include direct mortality from boat strikes, drowning in nets and loss of habitat. Dugong sanctuaries were introduced in 1998 to protect declining dugong numbers by recognising important seagrass habitat areas. Nonpoint source pollutants such as dissolved nutrients, pesticides and suspended sediment have the potential to affect the species composition of seagrass and the extent of seagrass beds that support dugong. We explore the nature of pollution costs to society and their implications on land uses in catchments adjacent to these protected areas. Policy options available to mitigate social externalities are examined recognising the influence of market failure.