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96 Part I California Water 2009;Blandford and Josling 2007).19 Changes in federal farm policy are needed to break this link and facilitate more efficient use of water. When water to some CVP contractors became less reliable as a result of the listing of several species for protection under the Endangered Species Act and the environmental water allocations mandated by the Central Valley Project Improvement Act of 1992,farm-to-farm water transfers became an important tool for supplementing farm water supplies on the western side of the San Joaquin Valley, including the Westlands Water District (Hanak 2003). The still large discrepancies in crop values and water use suggest the potential for much more use of water markets in response to further regulatory cutbacks and drought- related scarcity. For instance,during the recent drought,irrigated pasture still accounted for a sizable share of gross water use within the San Joaquin Valley.20 In Chapter 6,we discuss obstacles to continued development of water markets, including institutional and legal barriers, infrastructure limits (e.g., the diffi- culty of moving water from the east to the west side of the San Joaquin Valley), and concerns within source regions about local economic harm from transfers. Getting past these obstacles is an important priority for California water policy. Little growth in urban water use despite economic growth Urban water use is less directly linked to economic prosperity than in the case of agriculture,suggesting considerable flexibility to reduce use,if done carefully, without reducing regional or statewide economic activity.As a rough illustra- tion,the state's economy was 2.4 times larger in real terms in 2005 than in 1980, despite a 14 percent drop in total gross water use and a 30 percent increase in urban gross use(Figure 2.8).The economy grew another 14 percent from 2000 to 2005 with no increase in gross urban water use and an 11 percent decline in gross agricultural water use.21 Urban water use has a large,but less direct, effect on economic prosperity (Figure 2.12). Industrial water use tends to have an extremely high marginal 19. As an example,cotton subsidies are tied to past cotton acreage,but farmers are not allowed to grow fruits and nuts on that acreage and continue to qualify for the subsidy. 20. According to DWR statistics,in 2005,irrigated pasture accounted for 12 percent of gross water use in the San Joaquin River hydrologic region.In 2008,County Agricultural Commissioner Reports estimate that acreage of irrigated pasture within the eight-county San Joaquin Valley had fallen by 20 percent,suggesting some adaptation but considerable remaining water use for this low-value crop. 21. Within agriculture,the real value of farm output was 1.12 times higher in 2005 than in 1980,despite a 23 percent decline in applied water on farms and a 7 percent decline in irrigated crop acreage(authors'calculations using gross state product data from the U.S.Bureau of Economic Analysis and water use data from the California Department of Water Resources).