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A considerable number of studies have been made of institutional arrangements that can prevent excessive groundwater pumping based on Hardin’s seminal work, the “tragedy of the commons.” In contrast, this paper is concerned with groundwater quality control for which policy studies are very limited. This paper not only clarifies institutional challenges specific to groundwater contamination, but also demonstrates how government and industry could solve them using a case study of Hadano, Kanagawa Prefecture, Japan, which has pioneered countermeasures for groundwater pollution in Japan. Hadano solved the challenges by enacting an innovative local ordinance with three pillars: Proxy purification by the city government, fundraising for purification activities and a retroactive system. Lessons learnt from the Hadano case will be very useful to policy makers because these problems already occur in other urban areas, or are likely to occur in the near future.