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In this paper, we investigate optimal regulation to manage a groundwater extraction problem through a leader–follower differential game. A water agency, acting as the leader, selects two policy instruments, a water tax and a water threshold, to control withdrawals and preserve the aquifer. Farmers, as followers, determine their optimal extraction levels given the water agency’s policy. We compare scenarios in which the regulator controls both instruments with more restrictive cases. We show that a linear–progressive tax scheme strictly dominates linear taxation in terms of aquifer preservation and social welfare. Moreover, allowing feedback adjustment of the water threshold performs close to the fully flexible benchmark.