For more than 50 years, Monterey County and California State officials have pursued without success water policies to halt groundwater overdraft and seawater intrusion in the multilayer confined aquifers underlying arguably the most productive farmland in the United States. This study develops a general dynamic optimization model that emphasizes the institutional and physical characteristics that differentiate this policy problem from other groundwater extraction problems. The solution of the model exhibits heterogeneous spatial distribution of optimal extraction based on spatially distributed extraction cost, pumping cost externality, and seawater intrusion stock externality. Comparison of model results under alternative management regimes elucidates landowner economic incentives, reveals the potential welfare loss of current state policy, and explains much of the history of the political economy of water in Monterey County.