There has been growing concern over conversion of coastal rice paddies to shrimp farms. This study estimates the external cost of shrimp-induced salinity on crop production by comparing two villages in southern India: Poovam, which is affected by salinity, with Thiruvettakudy, which is not. Data show that the soil salinity status was normal in both villages in period prior to shrimp farming, in 1994-95. However, soil samples taken in 2006 show high soil salinity in Poovam, while salinity is in the normal range in Thiruvettakudy. Paddy yields are significantly lower in Poovam compared with those of Thiruvettakudy, with average net returns to paddy cultivation being negative. It estimate paddy production functions with different specifications and find that salinity has a negative and statistically significant influence on paddy yield. In the case of the Cobb-Douglas specification, a one per cent increase in salinity is associated with a 0.06 per cent decrease in paddy yields. It find that farms with highly saline soils can gain if soil salinity is reduced to safe levels, and that the gain can range from Rs 1,000 to Rs 5,000 per hectare.