Selected Empirical Analyses
New Horizons in Environmental Economics series
Edited by Phoebe Koundouri
Chapter 6: Households' valuation of domestic water in Indonesia: revisiting the Supply Driven Approach
6. Households’ valuation of domestic water in Indonesia: revisiting the Supply Driven Approach Arief Anshory Yusuf and Phoebe Koundouri 1. INTRODUCTION The Demand Driven Approach (DDA) has been one important aspect of the new paradigm of water provision as opposed to the old paradigm of the Supply Driven Approach (SDA). Proponents of the DDA approach argue that water is an economic good and its eﬃcient provision has to be directed to those who are willing to pay for it. Many case studies using the Contingent Valuation Method (CVM) suggest that people in poor rural areas of developing countries are willing to pay a signiﬁcant portion of their income for water (see, for example, Merret, 2002). This evidence rejects the so-called 3–5% rule (which deﬁnes the percentage of income that poor people can aﬀord to pay for water provision), a result that has provided signiﬁcant support for the DDA and the new paradigm of water management. We apply the hedonic analysis to a nation-wide microeconomic dataset for Indonesia.1 Our results indicate that in urban areas, people value having improved domestic water sources (piped and pump water), while this is not true for households in rural areas. Moreover, households in both urban and rural areas do not seem to value communal water sources, probably reﬂecting the eﬀects of the free-rider problem, when services have characteristics of public goods. On the whole, our results show that households in rural Indonesia are not willing to pay...
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