There are some obvious fixes here, like subsidizing the first N gallons/person/month (where N is some amount sufficient for basic human needs) and then charging

There are some obvious fixes here, like subsidizing the first N gallons/person/month (where N is some amount sufficient for basic human needs) and then charging market rate for water use above that level. You could even use a soft cliff, with a partial subsidy remaining up to 2N g/p/m, and let the generosity of the subsidy gradually decrease over time to "phase in" the adoption of market-rate prices and give people time to adjust their water usage.