In view of the slow progress of China's reclaimed water industry and incomplete incentives for reclaimed water utilization, the basic framework of reclaimed water utilization incentive mechanism is investigated, and the incentive theory and establishment process of the mechanism are systematically explained. Reclaimed water utilization incentive mechanism is a framework system, in which the government acts as the main incentive to stimulate enterprises and users to implement the reclaimed water production. Through the analysis of incentive process theory and the theory of Maslow's hierarchy of needs, obstacles of different reclaimed water utilization entities in the incentive process are pointed out. Combining the theory of incentive mechanism and the principles of environmental economics, the main ways and measures to promote the internalization of economic externalities in reclaimed water utilization are proposed. The reclaimed water utilization incentive mechanism effectively combines the government, reclaimed water enterprises, and users, and properly handles the relationship of interests, so as to promote the healthy development of reclaimed water market.