This report, commissioned by the California State Assembly, reviews the operations and legal basis for water rights allocation within the State of California, with particular emphasis on the incentives arising within that structure to use water efficiently. Two generic sources of inefficient water use are discussed: (1) the presence of external and internal subsidies to water prices in water agencies at all levels of water supply and (2) lack of both opportunity and incentive for users to engage in voluntary water trades (sales). Modifications are suggested in pricing structures of water supply agencies, legal and institutional restrictions on water sales, authorization for resale of Bureau of Reclamation water in the Central Valley Project, average cost pricing of water supplies, groundwater extraction, and rights to return flows of water.
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