You can try to reduce it indirectly using incentives, but it's more likely to have unintended consequences -- you want people to stop wasting water in a specific way, not to stop using water in all ways across the board. Like, say, washing their hands less.

When commodity prices rise you get a shockwave going through the whole economy, hurting everyone. You don't really want to do that on purpose.

Also, supply/demand curves work best when there's a sliding scale of supply that can react to the demand -- water and power (for two) don't really work that way. It takes years to build the infrastructure to deliver it, so instead you get shortages and MASSIVE swings in the price as it crosses the thresshold. The whole Enron scandal was about people manipulating this effect.