By allowing the price of water to go up, it would encourage more people from outside to fulfill the increased demand. By limiting prices, the government is not

By allowing the price of water to go up, it would encourage more people from outside to fulfill the increased demand. By limiting prices, the government is not just telling sellers they can't sell a product at a higher price, they are telling people that they cannot buy something they are willing to pay for. Prices are a very efficient way to allocate scarce resources, in this case potable water.