The paper develops and applies a game theoretic model of upstream and downstream countries to examine cooperative and noncooperative strategies of a common watershed. The application to the Tijuana River watershed shared by the United States and Mexico provides quantification of the strategies for internalizing water quality externalities to upstream and downstream originating from sedimentation. Results show that different transfer payments, such as the Chander/Tulkens cost sharing rule and the Shapley value, imply the size of the existing transfer from downstream to upstream could increase the amount currently allocated.