<p>Urban areas are among the areas in China facing the most severe water shortages, and using water price to promote urban residents to conserve water has become a necessary policy option for the government. The effectiveness of water price policies designed to promote water conservation depends on the fairness and efficiency of the water price adjustment strategy. To address this critical issue, this study constructed a three-party evolutionary game model involving the government, water supply companies, and urban residents, taking into account multiple factors such as economic benefits, ecological and environmental benefits, costs, and water supply services, and conducted numerical simulation analyses. The results indicate that the government's strategic choices are primarily influenced by economic benefits, tax revenue, the intensity of penalties imposed on water supply companies, ecological and environmental benefits, and the water-saving rewards and subsidies provided to urban residents. However, economic benefits are not the determinant in the government's strategic decision-making. The strategies of water supply companies are predominantly influenced by the intensity of government penalties, the saved water supply costs, and the costs associated with active participation. Urban residents will choose to respond to water price policies adjustments when the sum of water-saving rewards and ecological and environmental benefits, savings on water costs, and reductions in water resource taxes and sewage treatment fees exceeds the benefits urban residents gain from “free-riding” on improved water supply services. This study provides theoretical support and decision-making references for the government to advance water price reforms.</p>