Well, about 80% of water use (in the west) is for irrigation purposes. Ideally, making farmers pay market (and externality adjusted) rates for their water would discourage them from growing plants which need a lot of water per unit food (like alfalfa). We could get a LOT further with water-aware legislation for what farmers can grow (or if you prefer a libertarian viewpoint, have the government stop subsidizing water for farmers in drought prone areas).
Whether that would be enough to survive off the precipitation alone with our current population I kinda doubt (especially in Southern California), but you never know.
How much of that 80% of water used for irrigation is lost to evaporation and such. As the water is essentially 'free' to the farmers, they have little incentive to use it efficiently, so it would probably be cheaper to use sprinklers than more water efficient methods like drip irrigation.
Also, is the problem really that the government subsidizes water. As I understand it, there is a naturally occurring aquifer that is currently being used at free market rates. We would need the government to tax this to reduce usage.
I guess you're right in the cases of the aquifer's. There are 2 possible solutions. 1. Tax water pumped out of aquifers so that demand levels off at the aquifer fill rate, or 2. Wait until all the the aquifers are depleted to lower levels and force people to re-drill their wells and build new more expensive pumps. Eventually the cost of pumping out the aquifers will reduce demand to the aquifer fill rate.
