More than a quarter of California's agricultural land is irrigated. When the state had reeled under a prolonged drought in 1987-92, innovative concepts like water trading and water banking were interduced to counter it.

Infrastructure for storing arid transporting water was expanded earlier in the century. This major diversion of water had an adverse effect on water quality. Several species of salmon were endangered. Recent water reforms in California have attempted to restore some of the Central Valley for environmental purposes.

California farmers grow nearly 200 different crops with varying water use and technology, causing wide variations in water productivity. The problem is not of water availability, but management.

Farmers are assigned water-use rights according to the time they Start diverting water. They are not restricted to fixed quantities if They put the water to 'beneficial use', but can lose the right if it is not used. Farmers therefore, apply as much water as possible, without any qualms.

Economists have long argued that the efficiency of water use in agriculture will increase dramatically if only farmers are allowed to trade in water rights. However, markets in water are difficult to establish.

The crisis caused by the prolonged drought triggered major institutional changes. Water districts that received less water introduced block-pricing, in which farmers got a fixed quantity at a base price. More water could be obtained only at a higher price. These tiered pricing schemes encourage conservation and adoption of modern technology and provide revenues to water districts, which can be used to provide subsidies for technology adoption by farmers.

Water trade between and within districts was induced by various mechanisms. A water bank was created by the water districts. It bought water from districts with a surplus and sold it to districts running a deficit.

Surplus water was left in the San Francisco Bay and Delta districts, increasing water flow and leading to an improved habitat for fish and other marine life.

The Bradley-Miller Bill instructs the government to purchase water for restoration of the San Francisco Bay and Delta districts, it allows farmers to sell their water rights to cities and to one another. A study at the University of California found that water trading is The single most important factor that determines the impact of water supply reductions on the state agriculture sector. It found that output could be increased by more than 25 per cent with no additional water supplies, if only water trading were allowed.