Factual error: The scene where the Shark is in the water/air circulation pump it swims backwards out of it. There is no way a shark could do that, it would drown.
Continuity mistake: When Mike has the harpoon pointed for the sharks dorsal fin, there is white rope wound around the length of the metal harpoon. In the shot just before he shots the harpoon, there isn't.
Continuity mistake: When the shark is chasing the water-skiers, you can see its fin is about 3 feet behind them, meaning its head must be underneath, if not in front of them. However, in the shot from under the water its viewpoint is shown as being behind them.
Revealing mistake: When the baby shark smashes into the gate, not only is it a dummy by the way it looks, but the head actually compresses back into the body on impact.
Other mistake: When Jaws breaks the glass in the control room, it shatters and flies everywhere, but the water doesn't even move or give any indication of flooding the compartment.
Revealing mistake: When the shark crashes in the control room and eats Fred, "Fred" is a dummy. His hand moves around in the water in an unnatural manner.
Revealing mistake: When the baby shark dies it is an obvious fake rubber shark with no movement before it died and no reaction from the watching crowd.
Audio problem: Near the end of the film when the shark is in the control room he eats a man underwater. The man is heard to scream and cry out, and you can hear him taking breaths in between screams despite being underwater with no breathing equipment.
Revealing mistake: When the shark goes on a rampage at Sea World, whenever the fin goes above water, it is blatantly obvious that the fin is fake, and it is doubly obvious in some shots when we can see the welding line running right down the fin where the crew fused the two sides of the fin together.
Factual error: In the scene near the beginning of the film where a diver gets eaten by the shark, an unattached arm is left suspended in the water. Not one drop of blood was spilt into this water.
Revealing mistake: About two-thirds of the way through the film, there is a wide shot of Jaws swimming. Keep in mind that a shark swims by the moving of its body and tail. It's quite obvious to see that Jaws is a matted-in puppet as his tail moves only once and he is propelled a long distance. Also note the fact that the tail move is quite mechanical and not the easy motion a real shark would make, and his body doesn't move at all. The shark in Shark Attack 3: Megalodon looked better than this.
Revealing mistake: Matte lines are visible on the submarine as Mike and his girlfriend drive it through the reef.
Revealing mistake: Very obvious fake dummy when Mike and his girlfriend view the dead body.
Revealing mistake: Matte lines are visible around Jaws when he crashes into the window of the control room.
Revealing mistake: When Shelby's corpse shows up in a Ben Gardner like jump scare, you can tell that the hair is not attached after they made a mold of Harry Grant's chest and face and edited it.
Continuity mistake: After the big shark dies Mike and the blonde girl are calling the dolphins, in one shot it's dawn and it's dark but suddenly in the very next shot it's completely daylight.
Continuity mistake: The size of the small shark decreases a lot when it is caught.
Revealing mistake: When the shark bites the fish in half just before the opening titles you can see the back of the fish tank the shot was being filmed in.
Continuity mistake: When Mike is in the water doing the welding on the tunnel patch he is wearing a full face mask with the rebreather attached at middle, but when he and Kay are swimming away and go into the door back to the control room after being chased by Jaws, he is wearing just a regular snorkel mask with the rebreather in his mouth.
Continuity mistake: The small shark shrinks a lot when it's brought into the enclosure. If it were its original size, it would have stuck halfway out of the tank.
Answer: The lagoon was part of the theme park. Artificial with specific mammals inhabitants inside, warm and friendly.