> Consider your example and then walk along the demand curve for water at your new supply curve (your scarcity scenario). There is still surplus value created.

It's not that there is exactly none, it's that there is relatively less.

Suppose it takes a unit of water to live and there are a thousand people and a million units. Then the price is near zero and the surplus is huge -- the value of not dying is maybe a million dollars for the average person and more for people with access to more money, and they all get it for free.

Now suppose there are still a thousand people but only a hundred units of water. The price of a unit rises to five million dollars. At the [new] margin the surplus has gone from five million dollars to zero. The surplus for the person willing to pay six million has fallen from six million to one million etc. Everyone has lost five million in surplus and everyone with less than five million in original surplus has been priced out of the market.

Now suppose you want a "minimum price" for water. If the market price is just under five million dollars and you set the minimum price to five million even, you aren't pricing many people out of the market who weren't already. But you also aren't doing much to raise the price.

On the other hand, if the market price is zero (or, say, $5) and you set the minimum price at five million, you're causing widespread economic harm and pricing lots of people out of the market.