Severe environmental degradation appears to be threatening the long-term development prospects of countries all over the world, particularly the developing ones such as Nigeria. The paper reviews relevant literature and examines the process of environmental degradation via water pollution in Nigeria. While it notes that a careful management of water as a resource is essential for meeting a major demand created by accelerated urbanisation, industrialization and agricultural development, it highlights loss of revenue and declining health-care as some of the economic implications. The paper explores the possibility of applying economic instruments to mitigate environmental degradation, with particular reference to water pollution in Nigeria with a view to incorporating environmental costs in the decision-making process of producers and consumers. The paper posits that water pollution control need to be supported by coordinated policy, adequate legal and institutional framework which are essential tools for sustainable development.