David Zetland on Forbes:

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.

Low prices lead to shortages. Water managers respond to them with calls for conservation. But this often fails… When voluntary conservation fails, water agencies impose mandatory rationing, which is unfair and inefficient because people who have historically been water misers are cut back by the same percentage as water hogs.

If water was priced to reflect scarcity, a decrease in supply would lead to an increase in price, and people would demand less…

In a sensible water pricing system, everyone would be guaranteed a base quantity of water at a low price. Those who used more would face a steep price hike.