From one of the best blogs on the net, the Becker-Posner Blog:

Richard Posner:

The problem is that the market in fresh water is inefficient… a deeper problem is the institutional structure. One aspect is public ownership of water systems. There is no reason why a city should own the water company any more than it should own the cable television company. It is true that these are both networked services and therefore have aspects of natural monopoly; it would be wasteful to have multiple grids of water pipes in the same city. But through the contractual process a city can exploit “competition for the market”–that is, it can award a contract for the sale of water to whatever provider offers the best deal for the city’s residents.

Gary Becker:

Water is wasted in many ways by all sectors, and regulations do nothing to affect the main source of wasteful use of water: the inefficient pricing of water. Most irrigation systems in the world price water through annual flat fees, and not through charges that rise with the water consumed. Often domestic water use is not priced at all, and when priced, flat fees are far more common than fees that depend on use. As with any other scarce good, water is wasted when the cost of using more is negligible.

The obvious solution is to implement fees that rise with the amount of water demanded. Such fees are especially important in the agricultural sector since farming is a heavy consumer of water.