Also, if you look at countries that have the "free market" imposed on them, (the "Third World", the West uses protectionist measures to guard its people against the worst effects of capitalism) you'll see that there usually is no Middle Class, there is a very small class of super rich and a grand mass of exploited slaves, something I'd expect as outcome of the free market based on the way it works structurally.
Of course the structure of government would also have to change, you can't have people profit privately from decisions they make as government officials.
So you could assign a monthly water contigent to a household / other entity based on what they reasonably need, excluding wasteful activities in that calculation.
As opposed to regulation via the price, which genuinely hurts poor people while still not encouraging the rich to save water, or petrol or other things. It only forces behaviour change in those with low incomes and leaves more for the rich to waste. If you use water rationing with equal criteria for everyone you distribute the burden equally, with regulation via increased prices you always put the poor at a disadvantage and lower their living standard more than necessary.