Willingness to Pay for the Quality of Drinking Water

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1 The Pakstan Development Revew 46 : 4 Part II (Wnter 2007) pp Wllngness to Pay for the Qualty of Drnkng Water ABDUL SATTAR and EATZAZ AHMAD * 1. INTRODUCTION Wllngness-to-Pay to avod rsks has long been recognsed as an mportant response to perceved envronmental and health hazards. Abdalla, et al. (1992) have documented the exstence of consumer avertng behavour n response to potental water contamnaton, whle Musser, et al. (1992) Smth and Desvouges (1986) and Courant and Porter (1998) were among the frst to provde a theoretcal framework for the avertng behavour n response to polluton. All these studes estmated that avertng behavour formed a lower bound wllngness-to-pay for reducton n polluton under certan condtons. In developng countres wllngness-to-pay and demand for the good qualty drnkng water s often low. The major causes are lack of awareness regardng the contamnaton of drnkng water and low levels of household ncomes. The objectves of ths paper are (a) to estmate the effects of formal and nformal awareness of households on the demand for the home purfcaton methods and b) to estmate wllngness to pay for the safe drnkng water. To accomplsh these objectves we develop a theoretcal framework of households water purfcaton behavour by ncorporatng the wealth and awareness ndcators of households. For ths study prmary data of households are collected from Hyderabad cty wth known hstory of polluted water. Multnomal Logt regresson s used to analyse the effects of awareness and wealth on safe drnkng water practces among households. By usng estmated probabltes, costs of the dfferent methods of purfcaton are calculated to arrve at the estmates of wllngness to pay for the safe drnkng water. The estmated results show that the educaton level of female decson-makers compared to that of male decson-makers has more sgnfcant effect n usng any or even more expensve method of purfcaton. Furthermore, on average educaton level of decson makers s more mportant factor contrbutng to wllngness to pay for safe drnkng water than the wealth of households. 2. THEORETICAL FRAMEWORK The tradtonal demand functons are dependent on, besdes ncome and prces, several other factors capturng preference structure of households lke demographc composton, educatonal levels, professon and resdental status of households [see Deaton (1980)]. In cross secton data all consumers face the same set of prces and, Abdul Sattar <asattar.n@gmal.com> s Research Offcer, Fnance Dvson, Government of Pakstan, Islamabad. Eatzaz Ahmad <eatzaz@qau.edu.pk> s Professor, Department of Economcs, Quad--Azam Unversty, Islamabad.

2 768 Sattar and Ahmad therefore, the varatons s prces pad by dfferent consumers do not represent genune prce varatons; these may be due to qualty dfferentals and the dfferences due to locatons The budget allocaton decson of households n our context may be understood as a mult-stage budgetng process. For example, at the upper stage budget s allocated to food, health and other categores. Then at the lower stage the food expendture s allocated to clean drnkng water and other food tems, whle the lower-stage stage health expendture s allocated to curng of darrhea and other waterborne dseases along wth other health tems. Engel s law observes that the nature of preferences s such that ncome-consumpton curves are skewed, that s, as budget sze ncreases, the budget share of luxures tends to rse and that of necesstes tends to declne. Ths mples that rch households are more lkely to allocate a larger share of ther budget to more expensve water purfcaton devces as compared to poor households. In a typcal avertng behavour model developed by Courant and Porter (1998), water purfcaton practces enter nto utlty functon through households producton functon of health. Thus denotng the quanttes of compostes goods health and all other goods by H and Y respectvely, the utlty functon of a consumer can be wrtten as U = U [Z, H(A, )] (1) where Z s the Marshallan composte good, H s a measure of health level, H(.) s the producton functon for health, A s the set of avertng actvtes, s an ndcator of the perceved health-rsk assocated wth drnkng contamnated water. It s assumed that U A > 0 and U < 0. Here we have assumed that households get utlty through the drnkng safe water and ndrectly through the health. We consder four water purfcaton devces, whch are electrc flter, ordnary flter, use of chlorne tablets and bolng. If a household s uses two purfcaton methods, we consder the one that s the most effectve, where effectveness follows the order: electrc flter (most effectve), ordnary flter, use of chlorne tablets and bolng (least effectve). Further, household chooses between A and Z subject to budget constrant. Y = Z + P 1 A 1 + P 2 A 2 + P 3 A 3 + P 4 A 4 + C, where Y s ncome P s the prce of water alternatve and C s the average cost of fltered water. The prce of the composte good s set equal to unty. Gven that the consumer chooses water alternatve j, the condtonal demand for water practces can be solved as a functon of wealth (a proxy of permanent ncome), awareness (formal and nformal) and other varables lke sex and occupaton of decsonmaker and occurrence of darrhea among 0 5 age members of the household. That s, A j = A j (P j,y, M, O) (2) where M s the set of awareness varables and O s the set of other varables. To estmate wllngness to pay for the safe drnkng water we frst obtan the predcted probabltes of each choce from multnomal logt model that determnes the decson to adopt one of the four methods of purfyng drnkng water vs-à-vs no water purfcaton. The equaton for the multnomal regresson model s gven by exp j X P Y j X j = 1,, 4 (3) 1 4 m 1 exp m X

3 Payng for Drnkng-water 769 The predcted probabltes of each choce are then multply by the cost of adopted water purfcaton devce. The cost of adoptng a purfcaton devce s estmated as the annual cost reported by the surveyed households. Let C j be the actual cost assocated wth jth method of purfcaton for th household and P(A = j) be the probablty of the adopton of a purfcaton method j by th household predcted from the estmated multnomal model. Then the (WTP ) by th household s gven by WTP = C 1 P(A =1) + C 2 P(A = 2) + C 3 P(A =3) + C 4 P(A = 4) (4) Now from polcy perspectve, t s mportant to determne how ths WTP s affected by changes n varous explanatory varables. For ths purpose we regress estmate WTP on a set of explanatory varables by Ordnary Least Square (OLS) method, that s; WTP = ß X + (5) From ths wllngness to pay we wll calculate the mean wllngness to pay. Snce there are four choces for water purfcaton, the multvarate logt model takes the form: exp j X P Y j X j = 1,, m 1 exp m X 3. SURVEY DATA The data used n ths study are based on a survey conducted by researchers themselves from Hyderabad cty n the year The stratfed random samplng technque was used to collect the nformaton about varous characterstcs of 514 households, whch conssts of 3796 household members. The populaton of each stratum s taken form Dstrct Census Report 1998, whch shows that Hyderabad cty s admnstratvely dvded n four parts; the three Tehsls (Hyderabad cty, Latfabad and Qasmabad) and one cantonment. Total populaton of the cty accordng to the Census s mllon. The dstrbuton of the sample s based on populaton and the number of Unon Councls of the area. Nne households are chosen randomly from each unon councls of cty Tehsl, whle ten households are chosen, agan randomly, form each of the rest of unon councls. Admnstratvely cantonment has not been further dvded nto unon councls. However, ts populaton s much hgher than average populaton of a unon councl n other parts of the cty. So, the authors made ther own convenence strata based on number of households n the area. The same treatment s gven to the remanng areas of the cty. Geographc dstrbuton of populaton and the randomly drawn sample are shown n Table 1, whch also shows average sze of households taken from each regon. Table 2 shows the dstrbuton of sampled households wth respect to age, gender, and educaton levels of members of the sampled households.

4 770 Sattar and Ahmad Number of Unon Councls Table 1 Sample Profle Average Populaton of Unon Councl Number of Households Chosen Average Household Sze Name of Area (Tehsl) Populaton (Thousand) Cty Latfabad Qasmabad Cantonment 85 3* Remanng Areas 200 7* Total * Dstrct Census Report does not classfy the total area nto Unon Councls n these regons. The numbers are obtaned on the bass of the average sze of a unon councl n the dstrct. The numbers shown are those retaned after dscardng some of the sampled households due to ncomplete and/or sketchy nformaton. Table 2 Educaton Profle of the Sample Number of Males wth Educaton Number of Females wth Educaton Age n Years Illterate Illterate Above Total Percentage Geologcally, the cty s a flat-topped wth subtropcal, sem desert type condtons. The man source of drnkng water of the cty s surface water, whch s served by fve water supply systems. Snce long the qualty of drnkng water n Hyderabad has been poor. Mukesh and Zeenat (2001) estmated the contents of metals n drnkng water of Hyderabad cty by takng 18 water samples from dfferent locatons. The results of the study reveal that water qualty n the cty s poor aganst the standard health values. The statstcs shown n Table 3 ndcate that out of 514 households, percent households are not treatng ther drnkng water, whle remanng percent households are usng some water purfcaton devce wth percent usng the bolng technque, 5.64 percent chlorne tablets, percent ordnary flter and percent electrc flter at ther homes. For estmaton, educaton wll be used as a proxy for health awareness of households regardng the drnkng water contamnaton. Educaton s classfed nto fve categores, whch are no educaton, 1-8 years of educaton, 9-12 years of educaton, years of educaton and 16 years of educaton or above. Table 3 shows that out of 65 llterate decson-makers of households, percent do not purfy drnkng water, whle percent bol water and only 1.54 percent use the most expensve method of water treatment, that s, electrc flter. The percentage of households who do not purfy

5 Payng for Drnkng-water 771 drnkng water reduces to 15.2 percent as decson-makers gets the hghest level of educaton, whle for the same educatonal level, the percentage of bolng ncreases to 31.2 percent and for electrc flter to 29.6 percent. The survey also collected the nformaton on whether household members read newspapers, watch televson or lsten to rado on regular or rregular bass. Table 4 shows that decson-makers n 350 of the 514 households almost never lsten to rado and among them do not purfy ther drnkng water. Further, decson-makers n 469 of the 514 households watch televson at least once n a week, out of whch only percent do not purfy drnkng water at ther homes. Lkewse decson-maker n 335 households read newspaper at least once n a week and out of these households only do not purfy drnkng water. It s expected that female decson-makers have greater wllngness to adopt safe drnkng water practces than male decson-makers because females are n general more ntensvely nvolved n the food related household actvtes. The data show that among the male decson-makers percent do not purfy water, whle ths proporton reduced to only percent among the female decson-makers. The most commonly adopted devce for safe drnkng water among the female decson-makers appears bolng of water. Data show that among the female decson-makers percent female use boled water, whch reduces to percent for the expensve methods lke electrc flter. One can also expect that the members of a household belongng to medcal professon have better stock of knowledge regardng water contamnaton. The data n Table 3 show that among the 32 households n whch the decson makers are workng n medcal professon, only percent do not purfy drnkng water at ther homes, whle percent use the most expensve and most effectve devce, that s, electrc flter. The correct nformaton on consumpton, ncome, or wealth of households cannot be collected accurately. However, the survey collects nformaton on households ownershp of varous assets and dfferent characterstcs of household dwellng. A wealth ndex s then calculated from the gven nformaton by usng frst prncple component. 1 For the ease of nterpretaton, the analyss s carred out on the bass of wealth quartles rather than the actual wealth ndex. Households of the lowest wealth quartle correspond to the poorest unts of the sample, whle those belongng to the hghest quartle represent the rchest unts. Table 3 also shows the relatonshp of water purfcaton practces wth the four wealth quartles. Ths relatonshp ndcates some correlaton between the two attrbutes. In partcular, households belongng to the lowest wealth quartle tend to rely on the cheaper water purfcaton devce of bolng, whle among those belongng to the two upper wealth quartles, a larger percentage s found to use electrc flters. 1 Consder a data matrx A consstng of m columns (varables) and n rows (observatons) on the m wealth ndcators. Denote the egenvector assocated wth the largest egenvalue of the varance-covarance matrx of A by v. Then v A m v a j s the defned to be the frst prncpal component of the matrx A. The 1 frst prncpal component s a lnear combnaton of the varables n the matrx A that captures the maxmum common varaton n these varables.

6 772 Sattar and Ahmad Table 3 Dstrbuton of Purfcaton Adopton Rates (Percentages) by Households Characterstcs Number of households No Purfcaton Bolng Chlorn/Alum Tablets Candle Flter Electrc Flter Household Characterstcs Educaton Level of Decson-maker No Educaton Years Years Years Years or Above Meda Exposures of Decson-maker Lstenng to Rado Almost Never At least Once a Week Watchng TV Almost Never At least Once a Week Readng Newspaper Almost Never At least Once a Week Sex of Decson-maker Male Female Occupaton of Decson-maker Non Medcal Professonal Medcal Professonal Household Wealth Bottom Quartle Lower Mddle Quartle Upper Mddle Quartle Top Quartle All Households RESULTS AND DISCUSSION Results from multnomal logt model are shown n Table 4, the dependent varable conssts of fve categores.e., no purfcaton, bolng, use of chlorne/alum tablets, ordnary flter and electrc flter. The no purfcaton method s taken as the base category. The margnal probablty coeffcent of the frst educatonal level (1-8 years) of decsonmaker s sgnfcant only for bolng method. On average the probablty that households wth 1-8 years of schoolng bols water for drnkng s 23 percentage ponts hgher as compared to the households wth llterate decson-maker. The margnal probablty of bolng technque reduces as decson-makers become more educated. The probablty that the households wth the most educated decson makers (16 or above years) adopt the most expensve technology (electrc flter) turns to be 40 percentage ponts hgher than the households wth llterate decson-makers. Among the meda exposure varables rado lstenng habt of decson-makers s statstcally nsgnfcant for water purfcaton technques, whle televson-watchng habt s only sgnfcant for the use of chlorne tablet for water purfcaton. The newspaper readng habt of decson maker has sgnfcant nfluence on the probablty of adopton of all the water treatment methods.

7 Payng for Drnkng-water 773 The wealth quartle dummes have nsgnfcant effect on the households purfcaton behavour except for the thrd and fourth quartles for the most expensve technque that s electrc flter. The estmated margnal probablty coeffcents show that on average the probablty of usng electrc flter to purfy drnkng water among the thrd and the fourth wealth-quartle (rchest) households s respectvely 21.1 and 25.8 percentage ponts hgher than the frst wealth-quartle (poorest) households. Other varables ncluded n the set of explanatory varables are the occurrence of darrhea among 0 5 years old members of the house, sex and occupaton of decsonmakers. Sex of the decson makers s hghly sgnfcant for all the methods of purfcaton. On average female decson-makers are 36, 12 and 3 percentage ponts more lkely to use bolng, ordnary flters and electrc flters at ther home respectvely as compared to the male decson-makers. Explanatory Varables Table 4 Margnal Effects of Multnomal Logt Regresson Bolng Educaton of Decson-maker; 1-8 Years 0.230* (0.006) Educaton of Decson-maker; 9-12 Years 0.107* (0.005) Educaton of Decson-maker; Years 0.046* (0.002) Educaton of Decson-maker; 16 Years or Above 0.031* Rado Habt of Decson-maker (0.708) TV Habt of Decson-maker (0.417) Newspaper Habt of Decson-maker 0.087** (0.010) Second Wealth Quartle (0.147) 3rd Wealth Quartle (0.366) Top Wealth Quartle (0.175) Darrhea 0.108* (0.047) Sex of Decson-maker 0.357* Occupaton Decson-maker (0.854) Log Lkelhood Number of Observatons 514 Probabltes of Purfcaton Methods Chlorne/ Candle Alum Tablets Flter (0.351) (0.725) (0.821) (0.562) (0.295) 0.012* (0.163) (0.220) (0.583) (0.641) (0.283) 0.001* (0.019) (0.780) (0.903) (0.207) 0.037* (0.018) 0.045* (0.007) (0.288) (0.360) 0.101* (0.001) (0.218) (0.551) (0.631) (0.229) 0.117* (0.568) Electrc Flter (0.215) 0.173* (0.046) 0.369* (0.002) 0.396* (0.862) (0.135) 0.042* (0.030) (0.234) 0.211* (0.001) 0.258* (0.004) (0.963) 0.029* (0.327) Note: The probabltes values of the margnal effects are reported n parentheses. The margnal effects sgnfcant at 5 percent and 10 percent levels are ndcated by * and ** respectvely.

8 774 Sattar and Ahmad Based on predcted probabltes of varous purfcaton methods from multnomal logt model, we have calculated WTP. To relate ths WTP to household wealth, educaton, and meda exposures, we have estmated a lnear regresson equaton by OLS. The results are reported n Table 5. These results show that the two hgher levels of educaton are statstcally sgnfcant at 5 percent level of sgnfcance and the top educatonal level has the maxmum WTP. On average, f a decson-maker s has 16 and above years of schoolng then hs wllngness to pay for qualty of drnkng water wll be rupees hgher than that of an llterate decson maker and rupees hgher than that of a decson-makers who has years of schoolng. Table 5 Parameters Estmates of the Wllngness-to-pay Equaton (n Pak Rupees) Explanatory Varables Coeffcents Constant Educaton of Decson-maker 1-8 Years (0.54) Educaton of Decson-maker 9-12 Years (0.21) Educaton of Decson-maker Years * Educaton of Decson-maker 16 or Above Years * Rado Habt of Decson-maker (0.46) TV Habt of Decson-maker (0.13) Newspaper Habt of Decson-maker 69.14* (0.01) Second Wealth Quartle 3.89 (0.89) 3rd Wealth Quartle 86.81* Top Wealth Quartle * Darrhea 40.06* (0.05) Sex of Decson-maker * Occupaton Decson-maker * Number of Observatons 514 F-statstc 19.29* R-squared Note: The statstcs sgnfcant at 5 percent and 10 percent levels are ndcated by * and ** respectvely.

9 Payng for Drnkng-water 775 Among the meda exposure varables, only newspaper habt of decson makers s statstcally sgnfcant, and on average rupees hgher wll the WTP, f household decson-maker reads newspaper at least once n a week. The top two wealth quartles are statstcally sgnfcant at 5 percent level of sgnfcance. The households who belong to upper-mddle and topmost wealth quartles have on average 86.8 and rupees hgher wllngness to pay than the households belongng to the bottom wealth quartle. Another varables ncluded n the analyss s the dummy for occupaton of decson- makers, whch s hghly sgnfcant and shows that households n whch the decson makers belong to medcal professon are wllng to pay rupees more for safe drnkng water than the households n whch decson-makers belong to non-medcal professon. Sex of decson-makers s also sgnfcant and ndcates that the female decson makers are wllng to pay on average rupees more than the male decson makers. The only varable wth an unexpected sgn of ts regresson coeffcent, whch s also statstcally sgnfcant, s darrhea. 5. SUMMARY AND CONCLUSION The study measures WTP for safe drnkng water practces among the households n Hyderabad dstrct, Sndh, Pakstan. The sample sze s 514 households, whch conssts of 3796 household members. The study estmates that there are statstcally sgnfcant and quanttatvely non-neglgble effects of formal educaton on the qualty of safe drnkng water. The study also fnds that there s a strong effect of nformal educaton lke electronc and prnt meda on the water purfcaton behavour of households. The wllngness to pay of a better-nformed household s more than an unnformed people, whle study fnds that the wllngness to pay of a better-educated person s 784 percentage pnots hgher than that of an uneducated person. Thus better level of formal and nformal educaton, especally among the women, about health hazards of contamnated drnkng water may prevent waterborne dseases, rather than focusng other strateges. Further, the study also fnds that female decson-makers are wllng to pay more and are more lkely to adopt some water purfcaton devce than male decson-makers. REFERENCES Abdalla, C. W., B. A. Roach, and D. J. Epp (1992) Valung Envronmental Qualty Changes Usng Avertng Expendtures: An Applcaton to Groundwater Contamnaton. Land Economcs 68, Courant, P. N., and R. C. Porter (1998) Avertng Expendture and the Cost of Polluton. Journal of Envronmental Economcs and Management 8, Deaton, A., and J. Muellbauer (1980) Economcs and Consumer Behavour. Cambrdge, M.A: Cambrdge Unversty Press. Mukesh, M. and K. Zeenat (2001) Content of Metals n Drnkng Water of Hyderabad. Pakstan Journal of Analytcal Chemstry 2:2,

10 776 Sattar and Ahmad Musser, W. N., L. M. Musser, A. S. Laughland, and J. S. Shortle (1992) Contngent Valuaton and Avertng Costs Estmates of Benefts of Publc Water Decsons n a Small Communty. Agrculture Economcs and Rural Socology. Pennsylvana State Unversty (Publcaton No. 238). Smth, V. K. and W. H. Desvouges (1986) Avertng Behavour: Does It Exts? Economcs Letters 20: 3, World Health Organsaton (2004) The World Health Report Geneva: WHO, Swtzerland.