Problem is, especially when a resource is scarce, markets are pretty bad, even worse than distributing things under normal conditions.And farming pretty much needs water, so increasing prices of water for farming means increasing food prices.

So you will still end up with rich people watering their lawns, but people with less income will have to suffer. I think this is better handled through heavy taxation and outright bans rather than trying to get an already finicky thing like a market to solve it.

It means increasing food prices specifically for foods that require extensive irrigation, and are likely ill-suited for the region they are being grown except for water subsidies, e.g. almonds in California. So it means shifting agriculture towards more sustainable crops, increased prices for some specific foods, and likely reduced water prices for the average consumer.

I think that the agriculture thing is again better achieved with regulation, rather than a magical market fairy.

Markets only make sense when a resource is scarce.

Tweaking the market and exemptions might be difficult and finicky. But managing taxation and outright bans is even more finicky.

I am not, btw, arguing for an electricity like system of daily auctions. Just for a 2-tier pricing system that covers the basic requirements with a low rate, and sets a roughly 'market clearing price' for the remainder.

For this I would also price untreated water quite a bit higher. The price isn't just set for the cost of extraction. It is mainly set for the opportunity costs of all others who cannot use that water. So untreated water should cost roughly the same.