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What happens then?These are neat thought-experiments because the challenge is to try to imagine everything that would be affected by water, how they interact, and what will happen to them, without blowing things so out of proportion that they sound unrealistic.
First, let's assume a best-case scenario for human behavior: that the majority of the population decides it wants to stay, at least for the near term, and that people decide to throw money and technology at the problem, and there isn't mass hysteria and so on.
I think two things will happen immediately, almost simultaneously: one, various demands for water will suddenly start competing with eachother (e.g. municipal vs. agricultural), and two, water conservation will become a big business, as big as energy conservation has become.
With the first, we're going to see food prices rise across the board. California alone produces a lot of dairy, a lot of fruit, a lot of vegetables, and a lot of it in the central valley areas. Water costs will rise, and so will food costs. This will exacerbate the already high cost-of-living problem in a lot of areas in the west, and there are a lot of struggling rural areas that will get into even more trouble.
With the second, homeowners eager to avoid ever-increasing water costs are going to be replacing toilets and other fixtures. Plumbers will be busy for a while. But, yards are going to be one of the first things to go for a lot of homeowners, so we're going to see a lot of xeriscaping, and as a result a lot of landscaping services are going to suffer really badly.
Coastal cities with sufficient resources -- San Diego, Los Angeles, Santa Barbara -- will start reactivating, building, or seriously considering desalination plants, all of which will need efficient power generation to be cost effective. So we might see some nuclear come back online, but that could take several decades easily.
Watersheds all over the state will suffer badly and environmentalists will freak right out. There will probably begin to be some long-term changes in ecology; there's already a wild fish problem in California and Oregon at least, and dry lakes and warm, dry riverbeds will pretty much destroy remaining populations. Fishing is still a big business in California, and that's going to suffer, as is a lot of adjunct business related to fishing: tourism, hospitality, and so on.
The dry conditions will leave the state ripe for wildfires, so there will almost definitely be an ever-increasing wildfire threat in the state, with increasing costs for firefighting and increasing loss of life and property. Smoke inhalation causes respiratory problems in large numbers of people outside of burning areas. When it rains on burned areas, there are mudslides, causing more property damage.
It will also get hotter, resulting in some desertification. I'll stop short of saying this is a runaway cycle, but it could get pretty bad.
At this point I see one of two things happening: either California quietly falls further and further into debt with more and more agricultural and other revenue losses, and falls out of the top 10 list of world economies as people begin to leave the state for greener or less expensive places, or some of the brilliant science and engineering talent in the west starts taking a very close look at attempting to turn the tide back, possibly with new agricultural methods, desalination, reclamation, and environmental efforts. For example, California is already considering reversing the flow of its aqueduct system (!) (http://www.mercurynews.com/science/ci_25709331/california-dr...).
Water shortages will also further divide the already politically divided state of California. Rural and agricultural areas already feel that their representation in the state is unfair, and the "state of Jefferson" movement is gaining a surprising amount of traction. As politicians and agencies are forced to make decisions on who gets water, nobody's going to be happy with the results; it will only add fuel to various efforts to break the state up into smaller states (which I think would be a massive, massive mistake for rural communities; as unfair as the current system is -- and it does need to be fixed -- there's no such thing as a wealthy rural state).
Ultimately, I think that a lot of how this turns out will depend on the leadership that the state has at the time.
Climate-wise, there isn't much that I expect people will be able to do other than adapt. This is not, however, the same as doing nothing. The sooner we begin to adapt, the less severe the adaptation will need to be later.