Ideally, water prices would be set by supply and demand. If the water supplier is running out of water too quickly, it increases the price until people are using the exact amount of water that the supplier has available. If the supplier has excess water available, the supplier lowers the price. The supply of drinking water is a little different from the supply of other goods in that it increases incrementally rather than in a smooth (or nearly smooth) curve. The reason for this is that water treatment facilities are expensive and tend to be limited in capacity. Thus, the supply curve will look more like a staircase than a ramp. Also, there is an upper limit to water supply curves when all the water in the region is consumed and the curve abruptly turns vertical. It may be possible to increase the supply slightly by trucking in water from other regions, but at that point the water may already be too expensive for consumers to afford.
Here is a link to a discussion on the basic economics behind pricing goods:
These next two links contain more advanced content if you are interested in reading more about how some communities price their water and favor rural users over urban users.
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