But rather than reducing, even a little, the giant water subsidy that agriculture gets (senior members of the agribusiness establishment pay pennies on the dollar), it sounds like we're just telling some unlucky farmers they now have a cap on their usage.
Hmm, yeah I'd say what we really need is for farmers to just pay for what the water should actually cost. If it means almonds and beef get more expensive, so be it.
And before anyone tells Californians "just consume less", the problem is that California exports a lot of what is produced. I can't think of a better way to tell outsiders to consume less than to raise prices on exports.
A free market fix is not a right-now fix, right? The market is a powerful force but usually takes a little while to adapt. The optimal fix would probably involve short-term regulation and long-term market solutions?
In this case, the market will very quickly adapt. Because not adapting (increasing prices, reducing usage/costs, etc), will cause businesses to fail. And no one likes losing money or closing businesses, but they don't mind reduced profit.
The problem is that all this "short-term regulation" has caused increasing and cumulative lopsidedness in all sorts of relatively harmless areas of the market. That if we were to now "resort to the free market approach", we'd have a huge swath of population up in arms while the market self-corrects.
I.e. Farmers lose profits, forced to reduce water costs or close down. Then you'd have have all the consumers complaining about the rising costs of X,Y,Z. Then, you get the farm-workers unions (farms closing, jobs lost, etc) complaining. Then the politicians who want to cry-foul and make a campaign out of yet-more-free-stuff.
It's a snow-ball effect, and I exaggerate a little for effect above. Point being, there is no such thing as a "short-term regulation" fix without long-term dependency and momentum.
I think considering "replacement farms" is probably why you think that a market-solution couldn't work in this case. Think more out of the box, such as imports, or farms progressively further and further away (i.e. nearby states) ramping-up production to meet this newly-created demand. Heck, even consumer demand can change when products in high-demand have their price increase and there is little-left of it. Suddenly people make-do without certain things, change behavior patterns to suit their budget, and find alternatives.
I.e. Almonds, as one of the other responders mentioned to your comment. This is not something people "can't live without". If they wanted it prior to this market-adjustment, they'll probably not want it now that it's price has doubled. Or tripled if local shops start importing it from foreign suppliers.
The almond speculators will lose their shirts, but those are the risks of growing water-intensive crops in the desert. Many other crops, though, are planted annually, and skipping a field-year, or switching to a less water-intensive plant, is absolutely an option. Google "crop rotation".
Wouldn't that simply cause increased costs to be passed to the consumer (or just accept lowered profit), as opposed to doing what is necessary, which is reducing water consumption?
It would indeed increase the cost of California-grown food, which would encourage the other 49 states to eat a bit more locally. This would reduce California's agricultural export volume, and thus, save a huge amount of water.
Increased product prices would likely lead to reduced demand and in turn smaller farm output and water usage. Same is true for industry that also uses enormous amounts of water.
This is not an economically-optimal approach.