Regulatory restrictions on nutrient and suspended solid pollution have improved water quality in most U.S. watersheds. But many watersheds still suffer from poor water quality. A good example is Wisconsin’s Fox- Wolf River Basin where poor water quality remains a problem, especially due to phosphorus loading. Most of the gains in water quality have come from point-source reductions, which have now reached the stage of diminished returns and increased costs. Nevertheless, reducing point-source loads continues to be the target for stricter regulation. Market mechanisms to allow trading underneath a cap for both point and nonpoint sources offer a promising avenue to further and more practical improvements in water quality in the nation’s watersheds. The Fox- Wolf River Basin provides a good case study.