It’s not a matter of what I think ought to be the case or ought to have happened. It’s how to solve the problem at hand given the legal constraints that exist.
It’s possible those precedents could be overturned and open up the policy space, but given the current make up of the Supreme Court I think that’s unlikely to happen in the next few decades.
My point was just that If most voters are opposed to your solution, it won’t happen - even if that means nothing happens and we maintain the broken status quo - regardless of whether it is the only way forward within our current legal framework. In other words, noting that while it sounds viable from a raw economics perspective, it might hit problems with voter acceptability. And voters do care about what “aught to have happened”, for better or worse.
Regarding your concrete proposal - that seems like a purely free-market proposal that accepts that farmers should be able to capture all of the value from appreciation in their water rights over time. I imagine that would be politically difficult; at the other end of the spectrum is to say that the water rights should never have been sold and that it is a public good.
I would say that while I think a market on water prices would fix the problems with wasteful usages, I’m not sure I’d go so far as to support a market on water rights allocation, since there are other uses other than agriculture. But maybe the transfer liberalization program you suggest would just be within existing agricultural uses?
I did see an article a while back that was discussing micro-metering which allowed farmers to sell slices of their allocation - seems like there is a technical challenge here as well.
I expect the actual process of water right reforms in CA will be messy and tilt mostly towards the farmers, as there is no focused special interest group to fund lobbyists against theirs.