You price the externality correctly ( here, it would be a higher price on water. ) Then, if you want, you can provide a subsidy in terms of cash payments. That

You price the externality correctly ( here, it would be a higher price on water. ) Then, if you want, you can provide a subsidy in terms of cash payments. That subsidy must not depend on the actual consumption of water. This way, the marginal cost of the resource is correctly priced. See also LVT, CO2 pricing,…