This is such a classic "Tragedy of the Commons" situation. Nobody owns the water, so everyone grabs as much as they can, whether they need it or not.

(Compare with the shortage of cows and chickens. What shortage, you say? Exactly. It is managed by the owners of the cows and chickens so there's a ready supply.)

Government regulation is a lousy solution, as it will allocate the resource based on politics, not practicality, efficiency, or common sense. You see this as well in California - regulating showers with ineffectual results.

One way would be to allocate X gallons per year total can be pumped, and then auction off those gallon rights.