This dissertation investigates the issue of water policy in California, focusing on allocation rules in the agricultural sector and how they affect farmer crop choice and water usage. Chapter 1 includes background on California agriculture and the surface water and groundwater allocation system in the state, and a strategy for generating novel estimates of groundwater pumping and its externalities. Then a structural model is estimated and used in counterfactual simulations of new water policy regimes. Chapter 2 extends the analysis in a theoretical context by studying the dynamic farmer decision to grow a permanent crop. The model is solved and the equilibrium studied, the key question being how permanence interacts with water-intensity in a setting with externalities. This chapter also shows the characteristics of an equilibrium involving cycles in the share of farmers who grow water-intensive crops.