Coastal mariculture in the strict sense has not taken off in India due to many techno-bio-socio-economic factors. Hence a thorough economic analysis of coastal aquaculture in Kerala with specific reference to externalities has been attempted in the present study. The sample design of the study covers 208 farms practicing different types of mariculture in four districts of Kerala and the data were collected during 2001-03. Pollution was found to be the externality with significant effect, seriously affecting shrimp culture. This is clearly indicated by the reduction in production (37%) and reduced lease amount of Rs. 7,5001acre over the last eight years (1995-2003) in the study area. Although effluent standards have been set for the seafood industry and processing units, the absence of proper controlling and monitoring mechanism have led to the free flow of pollutants into the water bodies. The aver-def expenditure incurred for one acre of shrimp farm was Rs. 615.61 annum. The contingent valuation technique showed that about 50% of the farmers were willing to pay for getting good quality water for shrimp culture by establishing a common treatment plant. About 33 % of the farmers opined that polluters have to pay. The hedonic analysis showed that water quality index and water exchange index were significant at 1 % level in determining land value, clearly indicating the influence of water characteristics. In Kerala, polluter pay principle in general was found to be more effective in dealing with externalities like pollution. Top priority should be given to establish treatment plants by the industrial units considering the long term benefits. Local bodies like Panchayats are to be given the rights for monitoring of these treatment plants to avoid environmental degradation. The total extent of mangrove areas in and around Cochin backwaters and Vembanad lake reduced from 70,000 ha in 1975 to a mere 455 ha in 2002. The mangrove areas were converted for various purposes like coconut plantations, shrimp culture, reclamation and other development activities. About 21 .5% of the sample farms were built on mangrove areas. Mangrove destruction due to shrimp farming was found to be significant in the present study. The cost benefit analysis and economics of land use options in mangroves studied by different workers showed clearly that mangroves are not waste lands to be reclaimed.