Clearer flow, lower glow: Reassessing water valuation amid water quality improvement

Abstract

There is an implicit assumption in most regulatory analyses that baseline environmental conditions are static. In developing countries, rapid environmental improvements resulting from regulation can amplify the biases created by this assumption. This paper is the first attempt to link water quality as a baseline environmental condition with the marginal value of clean water. Leveraging positive shocks to water quality through the dissemination of water quality information to governments in an experiment in China, this paper estimates the effect of water quality on willingness to pay (WTP) for clean water. With an instrumental variable (IV) model, we find that a one-unit increase in water quality index would lead to an approximate 34.2 % decrease in WTP for clean water. Our findings highlight the diminishing marginal value of clean water in developing countries with tightening regulations and rapidly improving water quality. This suggests that overlooking the relationship between water quality and marginal value of clean water may lead to an overestimation of policy benefits. In addition, we provide suggestive evidence that our findings of a negative WTP effect are likely attributable to the reduction in perceived water quality risks.