And then the Mind Flayer points out that
1. it just has to eat like everyone else, that can't be a crime, especially as it's not its fault that it can only sustain itself on other sentient creatures' brains, and
2. the goblins have been involved in banditry and illegal activities anyway which had caused the city a much bigger setback already, and the goblins would deserve to be punished for their many crimes anyway. Not to mention that the Mind Flayer's eating habits already protected dozens of lives and prevented a series of crimes.
The Mind Flayer is totally willing to continue to restrict its diet to the goblins and other evildoers of the city (as approved by the local leadership and judiciary), as long as it's treated as an equal citizen. If needed, it brings up that it has a spellcaster friend who can speak with plants and animals, and would the PCs like to know what their would-be dinner thinks of them.
Also, isn't it a bad stereotype that the goblins live in the sewers and are into widespread banditry and illegal activities? And isn't cannibalism (which the Illithid, like so many other cannibals, practices for its biological needs) forbidden by law?
How will the PCs reach a solution that leaves everyone relatively happy and equal?
And your players thought they were in for a simple dungeoneering adventure.