In the 15th century, the island of São Miguel continued to receive settlers and in Lagoa those colonists steadily settled farther to the west, around the bay that became known as Porto dos Carneiros, where fishing began to take on an important aspect of the local economy.

It was created on April 11, 1522 by royal decree from King D. João III, and although the municipal seat was temporarily assigned to Água de Pau, it is currently occupied by the urbanized core of Nossa Senhora do Rosário and Santa Cruz.

Between 1991 and 2001, there was a 36% growth in the number of occupied dwellings in the urbanized core, while the communities of Água de Pau and Santa Cruz have also grown markedly (25.3% and 24.3%, respectively).

Administratively, five parishes comprise the municipality of Lagoa, with two specifically part of the urbanized core of the village (Nossa Senhora do Rosário and Santa Cruz); they are: Lagoa is twinned with: The 2001 Portuguese census identified a population of 5575 residents active in the workforce; 42.7% are employed: 85.5% as workers and 5% owners/proprietors, while the remainder pertain to unclassified classes, homemakers or active members of the local cooperative.

Recently, Lagoa has developed a tourist infrastructure associated in character with its historic past, but primarily its resort centers (for example, Caloura, in Água de Pau), bays, coves and beaches (such as Baixa d´Areia), traditional farms and older buildings (like the old monastery of Vale de Cabaços, commonly known as the Convento da Caloura) have attracted new visitors.

Its tourist ex-libris is the small resort hamlet of Caloura, nestled along the southern coast and separated from the neighboring community of Água de Alto.

Although it does not include a beach, the sheltered coves and volcanic rock bays are popular with locals and tourists for the clear blue-green waters, a natural pool and fisherman's port, as well as a bar and esplanade.

In Água de Pau, from Pico da Figueira, the Monte Santo Outlook is popular with tourists for the panoramas of the municipality, and further above, along the Regional Road between Água de Pau and Ribeira Chã, the outlook of Pisão provides vistas of Caloura, Ribeira Chã and parts of the neighboring municipality of Vila Franca do Campo.

The Praça de Nossa Senhora da Graça, a square in Lagoa is also another place of leisure that includes an open-air amphitheater, used in local cultural and recreational events.

Its location has been expanded and remodeled in the 20th century to both support the local community and to attract tourists to the Mercado de Peixe and restaurants along the port.