WATER RESOURCES RESEARCH, VOL. 42, W12407, doi:10.

1029/2005WR004833, 2006

Water shortages and implied water quality:

A contingent valuation study
Margarita Genius1 and Konstantinos P. Tsagarakis1
Received 22 December 2005; revised 19 August 2006; accepted 25 August 2006; published 14 December 2006.
[1] This paper analyses the extent to which households in an urban area are willing to pay
to ensure a fully reliable water supply when the latter induces changes in drinking water
quality. The water supply system in the city of Heraklion, Greece, is characterized by
periodic water rationing, which is more pronounced in the summer months. The
generalized use of cisterns and even water tanks helps residents cope with quantity
shortages but has a negative effect on the quality of the water reaching their taps. The
results of our contingent valuation show that respondents not affected by shortages and
already drinking tap water have a smaller willingness to pay, while positive perceptions on
quality have a positive effect.
Citation: Genius, M., and K. P. Tsagarakis (2006), Water shortages and implied water quality: A contingent valuation study,
Water Resour. Res., 42, W12407, doi:10.1029/2005WR004833.

1. Introduction
[2] The provision of a reliable water supply network
constitutes one of the main objectives of municipal water
authorities who face the problem of matching a seasonal
dependent water demand with a supply that is affected by
weather conditions. Whenever the water management policy
entails the avoidance of water shortages, the water capacity
needs to be sufficiently developed so as to satisfy demand in
periods of high demand or periods of drought. According to
Griffin and Mjelde [2000] such a policy might not be optimal
if the costs of ensuring full reliability are high and a policy of
periodic shortfalls might be superior.
[3] The case of Heraklion constitutes an example where
periodic water supply interruptions have come to be an
integral part of the everyday life of the city dwellers. Water
supply cutoffs are very frequent and last longer in the
summer months, when demand is high due to the tourist
season but they are not uncommon during the rest of the
year. When considering the costs necessary to expand the
water supply to a fully reliable level one should take into
account as well the private costs to dwellers of any invest-
ments they make to face the shortages. In Heraklion most
households have cisterns or even water tanks (a cistern is a
prefabricated tank of a standard size made of galvanized
metal or plastic placed on the roofs or in the basement of a
building, while water tanks are made from reinforced
concrete normally placed underground) that allow them to
smooth their water consumption in the face of possible
service interruptions, therefore supply disruptions effectu-
ated by the municipal authority do not always materialize in
water shortages for the households. However, their occur-
rence has an immediate effect on the consumption of tap
water as drinking water since many households are reluctant
to drink tap water and this despite the water managers’
1
Department of Economics, University of Crete, Rethymno, Crete,
Greece.
Copyright 2006 by the American Geophysical Union.
0043-1397/06/2005WR004833
claims that the quality is good. The main explanation for
this phenomenon is that the water offered by the water
company (at the source) is not of the same quality as the
water arriving in consumers’ taps as water supply disrup-
tions introduce soil in the water supply and subsequently
water sits in the water tanks. The situation is very different
in other Greek cities which are not exposed to periodical
rationing. In a recent report about the quality of drinking
water in selected European cities, almost all survey respond-
ents in Athens claimed to drinking tap water [Scientific
Committee on Toxicity, Ecotoxicity and the Environment,
2003].
[4] The objective of the present study is to analyze
whether residential water users in Heraklion would be
willing to pay higher water bills to ensure a continuous
flow of water when the implications of the latter are
twofold. On the one hand, the probability of running out
of water can, in principle, be reduced to zero while on the
other the water quality will not be deteriorated between
source (water company) and the consumer’s tap. Our results
show that households would indeed welcome an uninter-
rupted water service, moreover, willingness to pay is
predicted to be higher for those households suffering water
shortages and resorting to bottled water. Negative experi-
ence with water appearance and/or smell plays an important
role both to explain the decision to drink tap water and the
amounts people are willing to pay and favorable water
quality perceptions have a positive effect on WTP.
2. Water Supply in Heraklion City
[5] Heraklion City is the fourth largest in Greece with a
population of 140,000 during the winter and 160,000 during
the summer. The city is located in the northern part of the
island of Crete. Water supply and wastewater treatment is
managed by the Municipal Enterprise of Water Supply and
Sewerage (MEWSS) of Heraklion which is owned by the
municipality and serves 46,300 customers.
[6] Water supply is achieved through a potable supply
network that covers almost 100% of households, including

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W12407 GENIUS AND TSAGARAKIS: WTP FOR QUALITY-INDUCED IMPROVEMENTS
some areas outside the municipality’s borders. Water comes
from about 56 wells and springs in the wider area. The main
source of water is from wells, which are drilled from 100 to
400 m deep, where water is not influenced by surface
runoffs. Also, there are no heavy industries in the area that
could influence the underground water quality. These sour-
ces are selectively used throughout the year as water quality
may significantly vary especially when underground sour-
ces are overexploited. The various waters are mixed and
chlorinated in seven points before entering the distribution
network. Network losses are estimated at 35% and illegal
connections losses are estimated at 3% making a total of
38%. Water consumption to domestic, industry, hotels and
other uses (commercial shops, cafe, restaurants, schools,
hospitals, etc.) is 72.8%, 1.3%, 1.6% and 24.3% respectively.
Average water consumption per inhabitant is estimated at
153 L/d.
[7] Water supply interruptions result from both the fact
that water demand exceeds water supply, especially during
the summer months and that the municipality’s storage
tanks are not sufficient to cover demand during peak
periods. As a response to the present water deficit, most
households have at least a 1 m3 cistern or larger built water
tanks where water is stored to provide water in times when
supply interruptions are in effect. These tanks’ water ca-
pacity allows to cover at least a day’s demand. Water supply
may be continuous for some days during the winter, and
switch to one day supply – one day lack of supply during the
summer. Therefore the maximum period without water
supply can be 24 hrs. During the current year the construc-
tion of a dam (30 Million m3 total capacity) at Aposelemis
ephemeral river (20 km east of Heraklion city) has started
which will provide potable water for the wider area includ-
ing the city of Heraklion.
3. Water Quality and the Effect of Water
Supply Deficiencies
[8] Water quality standards are given by the 83/98/EC
Drinking Water Directive [European Union, 1998] which
has been adopted by the Greek legislation. The municipality
has made available to us data related to water analyses from
7 different distribution sources where 124 samples per year
are analyzed. According to this data the parametric values
set by the Part A and B of the first annex of the directive
were not exceeded. More specifically, all elements mea-
sured (F
, Fe+2, Cu+2, Mn+2, Zn+2, Pb+2, Cr+3, Cd+2, Ni+2)
were found in concentrations of approximately 10– 40 times
less than the maximum allowable or not detectable (Cd+2,
Ni+2, pesticides) or zero values (TC, FC, fecal Streptococci,
Pseudomonas). The concentration of trihalomethanes
(THMs) in drinking water has been studied in various cities
of Greece [Golfinopoulos, 2000; Golfinopoulos and
Nikolaou, 2005] and was found to be less than 56 mg/L
(100 is the maximum allowable) for the city of Heraklion,
which is among the lowest observed levels in many cities of
the developed world [Kampioti and Stephanou, 2002].
Residual chlorine was 0.05 – 0.4 mg/L. Considerably lower
than the indicated upper bounds set by Annex 1, Part C of
the directive, were the concentrations found for the follow-
ing parameters (maximum values reported in parenthesis):
Special conductivity (1700 mS/cm), SO
2 4 (110 mg/L), NO3


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W12407
(12.8 mg/L), NO
2 (0 mg/L), Mg
+2
(38 mg/L), pH varied
from 7.2 to 8.
[9] Although arsenic concentrations in the water supply
are of great concern in both developing and developed
countries [Nickson et al., 2005; Shaw et al., 2005], the
analysis conducted by Heraklion’s MEWSS showed that it
was not detectable. However, higher concentrations of
Chloride (Cl
) and Sodium (Na+) were reported in some
cases. Chloride concentration in two of the distribution
sources was above 250 mg/L, which is the maximum
indicated value from the 83/98/EC directive. These values
ranged from 195 to 398 mg/L and 42.6 to 270 mg/L for the
first and the second source respectively. The first distribu-
tion source also exceeded the recommended 200 mg/L
concentration of Sodium which was reported in the 98.5 –
230 mg/L range. This is due to the fact that the aquifer is
close to the sea and wells inevitably drop the groundwater
level causing sea intrusion that increases the salinity of the
groundwater. This is the reason for observing high concen-
trations of Cl
and Na+.
[10] The above figures indicate the absence of known
health risks coming from drinking tap water. This is further
supported by the fact that the local press and the media have
not reported such concerns either.
[11] In spite of the seemingly satisfactory quality indica-
tors, water reaching households’ taps is often looked upon
with suspicion since its quality is altered during the distri-
bution process as a consequence of supply interruptions.
Because of water network construction deficiencies, when
supply is on, water exits from the pipes to the soil. When
water supply stops, pipes are emptied. This makes some
water come back into the pipes sweeping soil which sedi-
ments. This soil is carried to the households’ water tanks
when the next supply starts. Then soil settles down in the
tank and any turbulence of incoming or outgoing water
keeps particles in suspension, leading it to the consumers’
tap. While the water company tries to keep water supply and
interruptions evenly distributed to all regions of Heraklion,
all households are not affected in the same way since houses
located at higher altitudes of the city will be the first that
will experience interruptions in the water supply compared
to those in lower altitudes.
4. Valuing an Improvement in Water
Supply Services
[12] Tap water is used for many different purposes in
today’s households’ activities and the spectrum of its uses
widens with the rising of living standards. Tap water is used
for bathing, washing, watering plants, drinking, watering
lawns, filling up pools and a myriad of other activities that
expand as a country’s development level increases. When
facing water shortages, households are going to make
choices as to what water needs or wants are going to be
satisfied first and it is conceivable that they do not value in
the same way water used for drinking as water used for
watering plants. In addition, the alternative uses of water
imply different demands on the characteristics of water,
water quality is important when it comes to drinking water
but it is less important when it comes to other uses. Since
the value households assign to an improvement of the water
supply depends on the level of the current service, it is
important to know how the latter is related to the current
W12407 GENIUS AND TSAGARAKIS: WTP FOR QUALITY-INDUCED IMPROVEMENTS
uses households make and also how they perceive the
different characteristics of water currently available to them.
[13] One approach followed in the literature is the avert-
ing behavior approach whereas households’ incur in certain
expenditures in order to cope with deficiencies in the water
supply. For instance, Pattanayak et al. [2005] consider five
types of averting expenditures related to the collection,
pumping, treating, storing and purchasing of water in
Katmandu, Nepal, and find that these costs are lower than
the estimated WTP for improved services that they derived
in the same study. Um et al. [2002] use the averting
behavior method augmented by a perception measure to
derive estimates of willingness to pay for safe tap water in
Korea. Indeed they claim that it is perceived pollution
levels and not actual pollution levels that explain averting
behavior and therefore they use households’ perceptions to
explain whether averting actions are undertaken.
[14] Another approach is the application of the contingent
valuation method which has been extensively used for
valuing nonmarket resources. The contingent valuation
method is a technique used to elicit values for nonmarket
goods based on the survey responses to hypothetic envi-
ronmental scenarios whereas the respondents are asked to
state their willingness to pay for a change in the environ-
mental good. Several studies have been conducted in
developing and developed countries to estimate the WTP
for improvements in drinking water quality and/or reliabil-
ity. In developed countries, studies related to water quality
have focused more on health risk reduction scenarios [see
Carson and Mitchell, 2006] while studies dealing with
water supply reliability have often focused on willingness
to pay to reduce the frequency and/or duration of shortages.
For instance, Howe et al. [1994] analyze WTP for higher
levels of reliability (and WTA for lower levels of reliability)
in three Colorado towns and find that WTP increases with
the level of reliability offered. In addition, WTP increases as
one moves from the high-reliability town to the low-
reliability towns, however the aggregate WTP does not
compensate for the higher costs of a more reliable water
system while only in the higher-reliability town aggregate
WTA could be covered by the savings derived from a less
reliable system. Hensher et al. [2005] conduct choice
experiments between different levels of shortages at differ-
ent prices for the water bill and report that both frequency
and length of water interruptions are important to customers
while their WTP decreases with each successive water
interruption. Barakat and Chamberlin, Inc. [1994] consider
the total elimination of specific types of future shortages and
report that WTP increases with increasing duration and
frequency of shortages while duration seems to be a more
important determinant of WTP. In developing countries
the major focus has been on inferring willingness to pay
for connections to the public water network or for access
to public sources of water, [see, e.g., McPhail, 1994;
Whittington et al., 1990].
[15] In the present study, the proposed improvement in
the water supply consists in the provision of a continuous
water flow which, as explained above, affects both the
quantity of water available to the consumers and the quality
of the water running through their taps. We use a variant of
the double bound contingent valuation model while we
focus on whether experience with shortages, different sour-
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W12407
ces for drinking water, quality perceptions and socioeco-
nomic characteristics have an impact on the value
households place on the amelioration of the water supply
system.
5. Elicitation Format, Survey Design,
and Data Description
[16] An important element of a contingent valuation
study is the elicitation format. It has long been recognized
in the contingent valuation literature that the adopted
elicitation format could affect the estimates of mean will-
ingness to pay [see Cameron and Quiggin, 1994; Alberini et
al., 1997]. While the single bound format has been identi-
fied as being incentive compatible, under certain assump-
tions, and is the format proposed in the guidelines set forth
by the NOAA panel [Arrow et al., 1993], it requires larger
sample sizes than the double bound format to achieve the
same efficiency levels. In effect, the introduction of a
follow-up question conveys more information about the
WTP distribution while it does not substantially increase
the cost of conducting the survey. While the double bound
has become the most widely used elicitation method, several
studies have reported anomalies introduced by its iterative
nature which put into question the reliability of the
responses to the second question. DeShazo [2002] considers
asymmetric elicitation effects in the double bound format
depending on whether the elicitation sequence is ascending
(second bid is higher than first) or descending (second bid is
lower than first). Borrowing arguments from prospect
theory he shows that responses to ascending sequences
are subject to framing effects whereas respondents who
accept the first bid form a reference point and view the
second bid as a loss. Therefore framing effects result in a
higher number of negative responses to the second question.
Since responses to descending sequences are not subject to
framing effects, he recommends that follow-up questions
should be restricted to ‘‘those that monotonically decrease
in value’’ [DeShazo, 2002] or else use the single bound
format.
[17] Given the above considerations, we adopt DeShazo’s
recommendation and ask a follow-up question only to those
respondents who had negative answers to the first bid.
[18] Data were collected through face-to-face interviews
in the summer of 2004. At the beginning of the interview
the respondent was informed that he/she had been randomly
selected to participate in a research conducted by University
of Crete and the National Agricultural Research Foundation.
It was stated that the objective of the research was to
investigate consumers’ evaluation of potable water quality
coming from the potable water network. It was also men-
tioned that any answers would be kept confidential, as there
was no identity data required. Before starting the interview
the respondent was asked to find the last available water bill
and have it in hand. This was necessary in order to recover
information such as water consumption and water bill paid
by the household. The first part of the interview included
questions to learn about the respondent’s water saving
activities, the frequency of water shortages and the severity
of its effects, the perceptions about water quality and water
drinking behavior. A brief explanation about the nature and
reasons for water interruptions and its effects on water
quality was presented followed by a possible program that
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Table 1. Description of Variables

Variable Name Description

Age respondent’s age

Female 1: female, 0: male
Numinf number of infants (below 2 years old) in the household
Famsize total number of household members
Garden 1: garden, 0: no garden
Sqmhse square meters of house
Educ1 1: high school not completed, 0: otherwise
Educ2 1: high school completed but not beyond, 0: otherwise
Inc1 1: monthly family income below or equal to ¼1500,
C 0: otherwise
Inc2 1: ¼1500
C < monthly family income C ¼3000, 0: otherwise
Herak number of years living in Heraklion
Tank 1: water tank or cistern present, 0: otherwise
Filt 1: some filter used, 0: otherwise
Bottle 1: drink bottled water, 0: otherwise
Bill quarterly total water bill per person in ¼
C
Cook 1: use tap water to cook most of the time, 0: otherwise
Watcolor 1: noticed blurred tap water color many times or always, 0: otherwise
Watsmell 1: noticed chlorine smell in tap water many times or always, 0: otherwise
Percqual1 1: perceived residential water quality is good or very good, 0: otherwise
Percqual2 1: perceived residential water quality is average, 0: otherwise
Watshopba 1: if water shortage problem is very or extremely important, 0: otherwise
Watqualpba 1: if water quality problem is very or extremely important, 0: otherwise
Savein 1: if take actions to save water inside the house, 0: otherwise
Nowat 1: has run out of water sometime in the past year, 0: otherwise
Once 1: has run out of water just once in the past year, 0: otherwise
2 to 6 1: has run out of water 2 to 6 times in the past year, 0: otherwise
7 to 12 1: has run out of water 7 to 12 times in the past year, 0: otherwise
>12 1: has run out of water more than 12 times in the past year, 0: otherwise
Shoeff 1: shortage effects on family are important or even serious, 0: otherwise
Drink 1: drink tap water, 0: otherwise
a
This question refers to a general context where respondents also evaluated problems of crime, unemployment, pollution,
traffic, etc.

could avoid them. The proposed program comprised the
investment in new sources of groundwater and the improve-
ment of the pipe network system to reduce leakages.
[19] The respondents were told that the cost of imple-
menting such a program would have to be covered by all
residents connected to the water network in the same way as
connection to the sewerage network is being currently
charged, i.e., through a percentage increase in the water
bill. They were also told that their answers, though confi-
dential, could play an advisory role as to the acceptability
and economic feasibility of the program. The willingness to
pay question was posed as follows: ‘‘Assume that it is
possible to ensure a continuous (24 hour) water supply, so
that the water quality between the source (municipal au-
thority) and your tap remains stable, would you be willing
to pay an extra x% of your current bills for this to happen?’’
The last available bill was used for illustration purposes to
show respondents what the extra x% meant in absolute
terms, but it was made clear to respondents that the
percentage increase would affect all ensuing bills.
[20] We opted for bids expressed as percentages of the
bill for different reasons. On the one hand, stated prices
should bear some resemblance to what respondents’ actu-
ally experience [see Hensher et al., 2005] where increases in
the water bill are expressed as a percentage of the annual
estimated bill, Schläpfer and Schmitt [2005] where bids are
expressed as a percentage increase in taxes, second most
additional fees charged by the water company are calculated
as percentages of the bill and finally, we felt that it was
easier for the interviewer to explain and compute what the
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resulting increase in the bill was than if the bid had the form
of a fixed Euro amount per cubic meter.
[21] Several pilot studies were implemented to determine
the offered bids and to polish the questionnaire. Two
versions of the questionnaire were randomly assigned to
different respondents and the corresponding initial bids
were 0.20 and 0.40 respectively. If the response to the first
bid was yes there was no further question but if the answer
was no a second lower bid was offered (0.10 and 0.20
respectively). Respondents who answered no-no to both
bids were asked what was the maximum amount they were
willing to pay and those reporting a zero value were asked a
follow-up question to determine whether they were real
zeros.
[22] A sample of 440 households was selected and a
maximum of three trials was set for those households that
could not be contacted on the first visit. In total 294
questionnaires were completed since 65 refused to partici-
pate and 81 kept postponing the appointment over the set
limit or were not found in their houses in any visit. From the
294 questionnaires some were disregarded since respond-
ents either failed to respond to some crucial question, there
were errors or the debriefing question identified them as real
zeros (9 respondents) leaving us with 281 questionnaires.
Table 1 describes the variables used in the analysis
which can be grouped according to (1) socioeconomic
characteristics (respondent’s age, gender, family composi-
tion, income, education level, number of years residing in
Heraklion), (2) water use (garden, square meters of house,
bill per person in the household, whether actions are taken
W12407 GENIUS AND TSAGARAKIS: WTP FOR QUALITY-INDUCED IMPROVEMENTS W12407

to save water usage in the house (savein); information was Table 2. Descriptive Statistics: Means and Standard Deviationsa
also collected on whether tap water, bottled water or other
water is used for drinking and whether tap water is used for Tap Drinkers: Nondrinkers: All:
n = 42 n = 239 n = 281
cooking, (3) water quantity characteristics (whether the
household has suffered water shortages in the past year Age 42.38 (17.04) 42.70 (15.4) 42.64 (15.62)
(nowat) and whether he feels shortages have important Female 0.52 (0.51) 0.58 (0.50) 0.56 (0.50)
Numinf 0.05 (0.22) 0.15 (0.38) 0.13 (0.36)
effects on family (shoeff), presence of a water tank (tank)), Famsize 2.86 (1.46) 3.04 (1.25) 3.01 (1.28)
(4) water quality characteristics (problems with color Garden 0.19 (0.40) 0.27 (0.44) 0.26 (0.44)
(watcolor), with smell (watsmell), presence of filter), and Sqmhse 85.31 (24.62) 94.64 (28.59) 93.25 (28.20)
(5) respondent’s perceptions about quality (percqual1, Educ1 0.21 (0.42) 0.27 (0.44) 0.26 (0.44)
percqual2; respondents were asked to rate the quality of Educ2 0.26 (0.45) 0.26 (0.44) 0.26 (0.44)
Inc1 0.33 (0.48) 0.36 (0.48) 0.36 (0.48)
potable water in Heraklion from very good to very bad on a Inc2 0.60 (0.50) 0.54 (0.50) 0.54 (0.50)
5 point scale). Herak 27.79 (20.44) 26.56 (19.16) 26.74(19.33)
[23] Out of 281 respondents only 42 (around 15%) Tank 0.98 (0.15) 0.97 (0.16) 0.97 (0.17)
reported drinking tap water, always or always except on Filt 0.98 (0.15) 0.16 (0.36) 0.28 (0.45)
Bottle — 0.85 (0.36) 0.72 (0.45)
rare occasions, 72% buy bottled water, 13% get water from Bill 13.7 (7.34) 12.37 (5.70) 12.57 (5.98)
third sources, namely, 8% use water from a spring or well Cook 1 0.69 (0.47) 0.73 (0.44)
and 5% get drinking water from another municipality. Some Watcolor 0.10 (0.30) 0.37 (0.48) 0.33 (0.47)
73% of the included households use tap water for cooking. Watsmell 0.14 (0.30) 0.66 (0.48) 0.58 (0.49)
[24] Descriptive statistics for all variables considered are Percqual1 0.07 (0.26) 0.02 (0.140 0.03 (0.17)
Percqual2 0.64 (0.49) 0.36 (0.480 0.41 (0.49)
reported in Table 2, both for the total sample and for the Watshopb 0.88 (0.33) 0.91 (0.29) 0.90 (0.30)
subgroups of tap water drinkers and non drinkers. It is worth Watqualpb 0.79 (0.41) 0.95 (0.22) 0.93 (0.26)
noting that 97% of the interviewed households have a water Savein 0.48 (0.51) 0.55 (0.60) 0.54 (0.59)
tank or cistern which provides them with some protection Nowat 0.57 (0.50) 0.41 (0.49) 0.44 (0.50)
Once 0.19 (0.40) 0.07 (0.27) 0.09 (0.29)
against water shortages. As far as socioeconomic variables 2 to 6 0.26 (0.45) 0.12 (0.32) 0.14 (0.35)
are concerned it is worth noting that the percentage of 7 to 12 0 0.07 (0.26) 0.06 (0.24)
households with infants is smaller for tap drinkers while >12 0.12 (0.33) 0.15 (0.36) 0.15 (0.35)
their education level seems to be higher. It is also worth Shoeff 0.31 (0.47) 0.51 (0.50) 0.48 (0.50)
pointing out that the percentage of households who report a
Standard deviations are given in parentheses.
problems with the water appearance and/or smell is much
smaller for drinkers. This could be because (1) sensitivity to
color and smell might not be homogenous or (2) 98% of
households who drink tap water use a filtering device, equation (1). The underlying willingness to pay is a latent
mostly a filter attached to the tap or water tank with some variable that depends linearly on a set of regressors and an
households even boiling the water before they drink it error term given by su with mean zero and variance s2
(while only 16% of nondrinkers use filters) or, finally, while what is observed is the YES/NO answer to the
(3) we suspect that the quality of the supplied water is not different bids. Some of the possible determinants of the
the same in all neighborhoods due to different groundwater dependent variable are related to socioeconomic character-
sources and different ages of the pipe network system. istics, experience with shortages, water quality and also to
These facts could explain as well why 71% of respondent’s drinking behavior.
who drink tap water perceive the quality as being average or
very good while this number falls to 38% for the rest. We WTPi ¼ Xi0 b þ dDi þ sui i ¼ 1; . . . ; n ð1Þ
also note the percentage of tap drinkers who have suffered a
water shortage is higher than that of the rest while they seem where WTPi is respondent’s i underlying willingness to pay
to be less negatively affected by the shortages. Because we for the improvement, Xi is a vector of explanatory variables
do not have data on the duration of each shortage and the for respondent i that affect willingness to pay, Di takes the
characteristics of water tanks, we cannot conclude that the value 1 if the household uses tap water as drinking water
types of shortages incurred by the households are uniform and 0 otherwise, and ui  N(0,1).
for all respondents. For instance, some households have [26] Equation (1) can be readily estimated by maximum
underground cement water tanks and a small water cistern likelihood using the observed responses, the presented bids
on the roof and then water is pumped from the tank to the and the normality assumption to compute the three under-
cistern. Since electricity shortages are not uncommon in the lying probabilities: P(yes), P(no,yes) and P(no,no). How-
island one could have the paradoxical situation of having a ever, the estimation of equation (1) is complicated by the
full tank but being unable to pump the water so that it is presence of the dummy variable Di. The tap drinking
distributed to all faucets. Other households just have a dummy variable separates respondents into two treatment
cistern on the roof and their ability to store water is more groups: tap water drinkers and non drinkers. As is the case
limited. in the treatment effects literature [see, e.g., Greene, 2003]
care has to be taken since respondents have not been
6. Econometric Specification randomly assigned but have self-selected themselves into
[25] The econometric model to analyze the responses to the two treatments and these endogenous treatment effects
the present CVM survey is the censored regression model could lead to selectivity bias. The latter might arise in the
proposed by Cameron and James [1987] and given by present context when unobserved factors that affect the

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probability of drinking tap water, affect the willingness to the number of household members and the number of liters
pay as well. For instance if it were the case that tap drinkers during a two month period to arrive at the final cost. The
are more ‘‘conformist’’ and less sensitive to quality than drinking water consumption is assumed to be the same for
other respondents they would display a lower willingness to all respondents and household members and was estimated
pay whether or not they actually drank tap water. One using the daily drinking water requirements per person
possible solution to the endogenous treatment effects prob- reported by FAO [World Health Organization, 2000].
lem is to jointly estimate model (1) and a model that Although the specific liter amount is arbitrary, we should
explains the choice of source for drinking water while note that it will only affect the magnitude of the cost
allowing for correlation of the errors of both equations. parameter estimate but not its significance.
This is the approach we undertake in the present analysis. [30] We further make the assumption that both errors
[27] The model explaining the decision to drink tap (u and e) follow a bivariate normal distribution,
water is based on the random utility model (RUM) [see    
McFadden, 1974], whereas a consumer facing J alternatives 0 1 r
ðui ; ei Þ  BVN ; :
0 r 1
will choose that alternative that maximizes his/her utility
given a budget constraint. The RUM specification adopted
below is closely related to that of Shaw et al. [2005] who [31] If r is equal to zero there is no selectivity bias
model choice of drinking water source but in a context problem and equation (1) can be estimated independently
where health risks are present due to arsenic contamination. of equation (5) otherwise the two equations need to be
In the present case we have two alternatives corresponding estimated jointly and the log likelihood in this case is given
to drinking tap water or not drinking it, where the second by,
option represents a costly alternative to the first. Therefore,  
along with individual characteristics, the cost of both alter- X
ti1 þ Xi0 b
ln Lðb; d; g; sÞ ¼ ln F
Zi0 g; ;
r
natives will be an important determinant of drinking Di ¼0
s
behavior. Denoting by UDi and UNDi the derived utility Ii1 ¼1
X  
from drinking tap water and not drinking tap water respec- ti2
Xi0 b
tively, we have, þ ln F
Zi0 g; ;r
Di ¼0
s
Ii1 ¼0
Ii2 ¼0
UDi ¼ aD þ bðYi
CDi Þ þ Wi0 d D þ Di  
ð2Þ X ti1
Xi0 b
UNDi ¼ aND þ bðYi
CNDi Þ þ Wi0 d ND þ NDi þ ln F
Zi0 g; ;r
Di ¼0
s
Ii1 ¼0
where Yi is income of i, CDi is the cost of tap water as faced Ii2 ¼1
by i, CNDi is the cost of the alternative as faced by i, Wi is  
ti2
Xi0 b
characteristics of respondent i that do not change across
ln F
Zi0 g; ;r
s
alternatives, and uDi and uNDi are components of utility not 
0  
X
t i1 þ Xi b þ d
observed by the researcher. þ 0
ln F Zi g; ;r
[28] The consumer will choose tap water as a drinking Di ¼1
s
Ii1 ¼1
source if 
0  
X
0 ti2
Xi b þ d
þ ln F Zi g; ;
r
Ui ¼ UDi
UNDi > 0 ð3Þ Di ¼1
s
Ii1 ¼0
Ii2 ¼0
or 
 
X ti1
Xi0 b þ d
þ ln F Zi0 g; ;
r
Ui* ¼ ðaD
aND Þ þ b ðCNDi
CDi Þ þ Wi0 ðd D
d ND Þ þ ei Di ¼1
s
Ii1 ¼0
¼ Zi0 g þ ei > 0 ð4Þ Ii2 ¼1


 
ti2
Xi0 b þ d

ln F Zi0 g; ;
r ð6Þ
Therefore the resulting model for choice of drinking water s
can be written as

 where F is the cdf of the standard bivariate normal, ti1 and
Di ¼ I Zi0 g þ ei i ¼ 1; . . . ; n ð5Þ
ti2 correspond to the bids offered (ti1 > ti2), and Ii1 and Ii2
where I(.) is an indicator function that takes the value 1 if take the value 1 if the answer is yes to the first, second bid
the argument inside the brackets is positive and 0 otherwise, respectively and zero otherwise.
Zi is a vector of explanatory variables that include
individual characteristics and choice attributes such as cost, 7. Results
and ei  N(0,1).
[32] Estimation results from (6) reveal that the null
[29] In order to estimate equation (5) we have to make
hypothesis that r is equal to zero cannot be rejected at
some assumptions about the cost of the two alternatives.
any usual significance level (5%, 10%) using the likelihood
The cost of tap water is assumed to be zero while for the
ratio test, implying that the equations for drinking and
cost of the alternative source we use the average price per
willingness to pay can be estimated separately, and these
liter of bottled water in local supermarkets for bottle
are the results reported in Table 3.
drinkers, and the local lowest price per liter of bottled water
[33] As far as the decision to drink tap water is concerned,
for the rest. The aforementioned prices were multiplied by
the estimated parameters have the expected signs. More

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Table 3. Estimation Results (t-Statistics in Parentheses) (from carrying bottles to boiling water and so on). The
quadratic term for age implies that willingness to pay
Variable Drink Equation WTP Equation increases with age up to a certain point (50 years) and then
Constant
1.227 (
2.414) a
0.022 (0.140) it decreases which could be explained by the reproductive
Cost 0.010 (2.006)a cycle of the family (presence of young children in the
Filter 2.670 (5.842)a household) and a turning point in expected future earnings.
Herak
0.018 (
2.633)a [35] As far as the variables related to drinking behavior
Female 0.068 (2.372)a
Savein
0.048 (
1.857)b and water quality are concerned, our findings point out that
Sqmhse 0.002 (2.902)a those households who already drink tap water place less
Bill
0.009 (
2.536)a value on the proposed improvement than bottle drinkers
Watshopb 0.122 (2.669)a (who bid the highest values) and drinkers from third
Garden
0.101 (
2.811)a
Educ2
0.099 (
3.012)a sources. More specifically the difference in the percentage
Inc1
0.168 (
2.177)a bids for bottle drinkers and tap drinkers is around 20%. It
Inc2
0.156 (
2.215)a could be the case that tap water drinkers regard the current
Bottle 0.087 (1.922)b level of water quality as satisfactory and place a smaller
Famsize
0.047 (
2.059)a
Watcolor
0.568 (
1.304)
0.130 (
3.589)a
value in the incremental quality brought about by the
Watsmell
0.716 (
2.083)a proposed plan. Bottle drinkers incur higher costs in order
Age 0.022 (3.228)a to acquire drinking water and therefore place a higher value
Agesquared/100
0.022 (
3.195)a on the proposed change. It should be mentioned at this point
Numinf 0.114 (2.314)a that the variable for filter was not significant in the WTP
Percqual1 0.110 (1.673)b
Drink
0.114 (
2.277)a equation. Those households who report problems with the
Nowat 0.060 (1.917)b appearance of water (watcolor) are on average less willing
s 0.168 (10.137)a to pay for the proposed plan and this could be due to the fact
Log likelihood
84.71
191.128 that they are skeptical that the high-quality scenario will
a
Significance at the 5% level. also apply to them or is attainable. On the other hand, those
b
Significance at the 10% level. respondents who perceive water quality as being good or
very good are willing to pay more on average than those
who perceive the current quality from average to bad. This
specifically, the results show that households who use a result could seem counterintuitive but in fact, quality
filter are more likely to drink tap water, households who perceptions reported by respondents refer to the water
have reported problems with smell or color are less likely to supplied by the municipal company which might differ
drink tap water (although watcolor is not significant at the from water reaching their taps for the reasons mentioned
10% level) and those who have resided in Heraklion for a in the introduction. In addition, perceptions about water
longer period of time are less likely to drink tap water. quality could be based on a wider information set than the
Possible explanations for the last finding could be related to respondents’ individual experience from his/her tap.
the fact that long-term residents are more exposed to [36] Estimates of mean willingness to pay are given in
different channels of information and ‘‘neighborhood talk’’ Table 4, on average respondents are willing to pay an
compared to newcomers and also that for the latter, tap additional 42.6% of their 3-month bill for the proposed plan
water might have been the main source of drinking water in ¼ 13.8). The mean willingness to pay was also estimated
(C
their previous location of residence. As far as the cost using the first bid only, namely the single bound model, and it
variable is concerned, it has a positive sign as expected was found to be higher and around 46% or ¼ C 15.1. Taking
and is significant at the 5% level. Therefore an increase in into consideration that this sum is not a once-and-for-all
the cost of bottled water would lead to an increase in the payment but would be levied on all future bills, we can
probability of drinking tap water. Because it is possible that conclude that households in the sample value the proposed
the use of a filter is endogenous in the drinking decision we plan quite positively. Although the size of the sample is small,
used the Rivers and Vuong [1988] two-step procedure to test local authorities can find this figure useful in their water
for the exogeneity of filter and we failed to reject the null management activities once they compute the cost of exploit-
hypothesis of exogeneity. ing additional sources of groundwater. Raising water fees has
[34] For the willingness to pay equation the signs for often encountered strong opposition in Greek municipalities
income are the ones expected from economic theory, and fear of retaliation in the following elections affects the
namely low income people are less willing to pay for an timing and occurrence of such measures.
improved water supply (the highest income group is the
baseline category). Households being adversely affected by 8. Conclusions
water interruptions (nowat) are willing to pay more
[37] In situations where deficiencies in the quantity di-
although it is significant at the 10% level but not at the
mension of the supply of water affect the quality dimension
5%. The opposite is true for those households who engage
in water saving activities (savein) and those who are heavier
users of tap water as reflected by the sign of garden, famsize Table 4. Mean Willingness to Pay and Confidence Intervals
and bill per person. Female respondents are on average
willing to pay more than their male counterparts and this WTP Estimates All Drinkers
could be explained by the more active role played by ¼13.9) 26.7% (C
Mean: Percent of bill (amount in Euros) 42.6% (C ¼8.8)
females in ensuring the provision of water for the household 95% Confidence interval [39.0%, 46.2%] [20.3%, 33.0%]

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W12407 GENIUS AND TSAGARAKIS: WTP FOR QUALITY-INDUCED IMPROVEMENTS
as well, perceptions of quality are important determinants of
willingness to pay to avoid shortages. In the case of
Heraklion, where most of the residents install tanks to cope
with quantity shortages, drinking behavior is greatly affected
by shortages. Our study finds that both experience with
shortages and drinking water from sources other than the tap
are important determinants of willingness to pay, with
average willingness to pay being much higher for house-
holds who rely on bottled water. The actual amount we find
for the average willingness to pay is way below the
expenses households incur in order to buy bottled water.
An averting behavior model might predict a much higher
mean WTP than the one we find but it might be debatable
whether expenses in bottled water can be considered as
averting expenditures in the present case. Some important
issues have not been thoroughly investigated in the present
study. For instance, the process quality perceptions’ forma-
tion has not been addressed and the use of filters has not
been analyzed in detail. Issues of information, or the lack
of it, rise in both cases. Are households aware of what
their filtering devices do? Do they keep an adequate filter
maintenance schedule? What are their sources of informa-
tion about water quality? Local authorities could play an
important role in providing information to residents about
the quality of residential water and affect their perceptions.
[38] Acknowledgments. The first author acknowledges partial sup-
port from a Marie Curie Transfer of Knowledge Fellowship of the European
Community’s Sixth Framework Programme under contract MTKD-CT-
014288. The authors are grateful to G. Dialynas and M. Koumakis,
employees of the MEWSS of Heraklion, for providing the data related to
the water supply, its quality, and quantity. Also, thanks are owed to M.
Manioudaki, E. Papadoyannakis, E. Skoula, K. Panagiotakis, and C.
Kontaki for helping with data collection. Last but not least, we would like
to thank the reviewers and the Associate Editor for their invaluable
comments that have helped improve the paper. The usual disclaimer
applies.
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M. Genius and K. P. Tsagarakis, Department of Economics, University
of Crete, University Campus, 74100 Rethymno, Crete, Greece. (genius@
econ.soc.uoc.gr)