[CoffeeDregs]

I'm puzzled at the down votes you're receiving. I think you have a valid point and I generally have a similar perspective, but, in this case, it overlooks a significant externality: the destruction of the environment as rivers are pumped dry and (albeit, artificial) reservoirs run dry. Further, your solution could make the additional extraction of water quite profitable, which would further the destruction.

The straightforward solution is to internalize the externality via a progressive tax on water usage. Then, as you said, the free market can regulate itself.

Note: I'm not a fan of taxation, but it can be a good solution to managing externalities.

[tracker1]

Or, do what we've done for roadways and electricity in this country (and to a lesser extent oil and water), and expand a "water grid" from the southwest to the midwest, and southeast... transporting water from water-rich locations to more drought-prone locations.

[refurb]

it overlooks a significant externality: the destruction of the environment as rivers are pumped dry and (albeit, artificial) reservoirs run dry

Not sure I understand. The rivers would run dry because of no rain, not because we're taking water from them. Remember all this water we're using for irrigation was just ending up in the ocean anyways.

[DougWebb]

Is the California produce you buy bone-dry? Probably not. It's full of that precious water. A lot may wind up in the ocean as runoff, but a lot gets exported from CA too. It eventually winds up back in the ecosystem, but the point is that it will take eons to get back into the acquifers.