Economic Valuation of Clean Water

Preferences for non-marketed goods or services, such as clean water, are not easily measurable. Consumers reveal their preferences indirectly, or when asked, they state their preferences. The techniques are known as revealed and stated preferences in valuation methodology. A newer method, known as the life satisfaction method of environmental valuation, has been recently introduced. The method presumes that as environmental quality deteriorates, individuals become less happy. This chapter presents preliminary ideas about the two well-known methodologies of non-market valuation – the revealed preference and the stated preference methods. It further extends the discussion to highlight the theoretical underpinning behind the life satisfaction or happiness method. Furthermore, the chapter examines the 5th wave of data from the World Values Survey to measure the marginal rate of substitution for water quality in India, using the life satisfaction method. The analysis of the data reveals that individuals residing in an area with poor water quality and those who perceive it as poor disclose their unhappiness. These people want the scenario to change and are willing to pay for water quality improvement.