A lot of water managers offer rebates to customers who remove lawns or replace old appliances.
These rebates are wasted when they pay customers who are going to take those actions anyway, but let's assume that they really DO motivate customers to change their potential demand for water.
So my question is this: What's the cost per acre-foot (or cubic meter) of these programs?
Let's examine the most famous program: The Southern Nevada Water Authority (of Las Vegas) will pay $1.50 per square foot to remove turf (and replace it with "desert landscaping"), for up to 5,000 square feet (464 m^2). Let's assume new landscaping uses zero water and that efficiently irrigated turf uses 62 gallons per square foot per year (source below).
Let's do the calculations: One acre foot of water contains 325,851 gallons, so 5,255 square feet of turf need to be removed to reduce water demand by one acre foot. How much will that cost SNWA? About $7,900. Of course, that's a one time payment and saving will occur over many years. If we use a 10% discount rate (turf removal reduces water use for ten years), then that's $790 per acre foot saved.
Is that a lot or a little? Farmers in Palo Verde Irrigation District (just down the Colorado River) pay about $4 per acre-foot for untreated water. The cost of desalinated water is roughly $1,000 per acre foot. So turf removal may be economical but probably isn't. For example, it's definitely not cost-effective when the payment goes to homeowners who already want to remove their turf or when owners who "feel good" about saving water use more (the rebound effect).
For more on not effective, read "Cash for grass" (on this page), where a landscape expert discusses three other programs and suggests six ways to reduce landscape water use that may be more efficient.
Bottom Line: Payment for lawn removal may be an easy program to administer, but it's probably not cost-effective in saving water or economically-efficient in finding the cheapest way to reduce water use. A direct incentive to use less water (raise prices!) would not only be more efficient (some people would remove turf; others would take shorter showers) -- it would also generate revenue.
Addendum: The author of the paper ("Sylvan Addink, PhD. Certified Professional Agronomist") has patents for managing water use on landscaping and a company that "provides environmentally enhanced landscaping irrigation." Seems that we have a biased source, but --luckily -- I wasn't relying on his numbers/arguments.