g, from an agricultural point of view, is that the annual precipitation varies tremendously. Fossil evidence indicates that the average figure masks sharp differences from year to year. Thus, while the average annual precipitation in Los Angeles over the period of a century is almost 15 inches, few years come close to this average. Instead, rainfall totals swing between extremes of 6 inches and nearly 40 inches. Cycles of severe drought alternate with those of heavy precipitation. None of the cycles are predictable in length and different sections of the state often experience different conditions, with one region suffering from drought at the same time another is literally under water (Hundley, 1992, pp. 9-13).
As white settlers flowed into California in the Nineteenth Century, the demands for water grew. Agriculture has always placed the largest demands on the state's water supplies, especially since California became one of the most important agricultural regions in the world. During the Twentieth Century, however, the state's urban population exploded, as the state also became one of the most important industrial regions on the world. As the population grew and more productive agricultural techniques were introduced state leaders began focusing on the problem of water. It was clear that the regions placing the most demands on the water supply, the Central Valley and Southern California, were the regions receiving the least amounts of rainfall. As these regions developed further, diversion of water from other regions grew increasingly necessary. Governmental water policy quickly concentrated on the development of new water sources to fulfill rising demand; little or no thought was given to developing and encouraging conservation techniques through market structures (El-Ashry & Gibbons, 1988, pp. 7-17).
Traditionally, the use of market structures to determine the price of water in California has been virtually rejec...