The provision of safe and universal water supply in an equitable and efficient manner is extremely important for urban water reform programs currently being carried out in developing countries. The sector reform not only requires a significant amount of working capital, but also people's willingness to pay for the improved infrastructure. This paper serves two purposes – first, it explains the meaning of ‘full-cost of water services’ in urban areas and attempts to provide a framework to value economic and environmental externalities for the urban water supply and use through a case study of India's capital city – Delhi. The second part uses contingent valuation method to establish people's willingness to pay from a survey of 1,100 households for water supply with better quality and reliability. Policy implications are subsequently discussed, keeping in mind cost of provision of water supplies. Also included is the assessment of the cost of unreliable supply (coping cost), which otherwise households are spending in the absence of a reliable supply. The paper shows several instances of reciprocal externality wherein the residents themselves absorb the cost of over-extraction, in terms of declining water tables, and cost of salinity in terms of decentralised treatment cost.

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