With population growth and urbanization, demand for improved water services has been growing. It is imperative therefore to examine different factors that influence demand for improved water services and the resultant welfare changes. Using cross-sectional household survey data collected through structured questionnaire from ten administrative units in Mekelle City, we estimate household willingness to pay models and identify major determinant factors of demand for improved water service. In order to help us do this, we considered selection issues and estimated models using the Heckman Two-Step Estimator. Our results show that the amount of bid (amount of money households would be willing to pay) that households (already connected to private taps) would be willing to pay is positively associated with household income, ownership of the house, price of vended water and the practice of water purification. For households who are not connected to private taps, the amount they would be willing to pay for (improved) private tap connection is positively associated with formal education, housing status and gender. We also investigate the welfare gains and losses as a result of improved water service. Analytical results show that, as the number of households who subscribe to improved water service increases, there is a gain in surplus for households and revenue (producer surplus) for the municipality.

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