E

Economic Analysis of Health Impacts in Developing Countries

VR Reddy, Livelihoods and Natural Resource Management Institute, Hyderabad, AP, India
& 2011 Elsevier B.V. All rights reserved.

development in any economy. A healthy workforce is

Abbreviations
very much essential to the development of an economy.
AC averting cost
A healthy workforce requires a healthy environment,
CAC command and control
that is, clean air, water, recreation, and wilderness. Most
CBA cost-benefit analysis
important and immediate consequences of environmental
CEA cost-effectiveness analysis
degradation in the developing world take the form of
CFC chlorofluorocarbon
damage to human health. Health impacts due to en-
COI cost of illness
vironmental changes are considered very important and
CVM contingent valuation method
have become integral to the assessment of development
DA decision analysis
projects. Economic analysis of environmental health
GDP gross domestic product
impacts has become critical for social cost–benefit
HC human capital
analysis (CBA) as well. Economic analysis of these im-
MCA multicriteria analysis
pacts would provide avenues for investments for miti-
RBA risk-benefit analysis
gating the adverse impacts. CBA of projects that mitigate
TCM travel cost method
adverse impacts can be worked out for policy purposes.
WTP willingness to pay
This article focuses mainly on the health impacts caused
due to environmental changes or ecosystem impairment
and economic assessment of these costs.

Introduction
Economic analysis of human health dates back to the
advent of life insurance programs. Such analyses were
based on general health risks, life expectance, and so on,
and vary across communities/countries. Economic anal-
ysis of health impacts has expanded beyond life expect-
ancy with the increasing prominence of environmental
economics during the recent decades. Ecosystems or
environment support the biological needs of humans,
namely, food, water, and air. Health and quality of
ecosystems influence human health and well-being.
Degradation of water, air, and land resources and climate
change could cause severe adverse health impacts on
human health. The ecosystem- or environment-related
health impacts could be grouped broadly under direct
and indirect impacts. Direct impacts include floods, water
scarcity, and pollution, and indirect impacts include
health consequences of pollution, degradation of re-
sources, livelihood loss, and displacement.
Human health is one of the most important factors
influencing policy measures, and thus economic
Environmental Health Impacts: Nature
and Extent
The most important resources that critically determine
the human health include water, air, land, and forests.
Often human interventions for meeting genuine liveli-
hood needs (anthropogenic pressure) or lifestyle changes
(market capture) alter or impair the resource systems.
Often markets are instrumental in bringing lifestyle
changes. Clean water, for instance, is essential for human
health: used for drinking, growing food, washing, cooking,
recreation, and so on. Water scarcity in many parts of the
world is adversely affecting food production and human
health. Degradation of water quality due to discharge of
industrial effluents, sewerage, overexploitation of aqui-
fers, salinity, and so on, has adversely affected economic
development and resulted in heavy losses to economic
welfare in terms of effects on agricultural activities,
human health, and ecosystem at large (see Box 1).
Basically, water pollution poses a serious challenge due to
its impact on a large number of economic activities. More

197
198 Economic Analysis of Health Impacts in Developing Countries
Box 1 Groundwater pollution and health
The consumption of saline or hard water can cause health
problems like knee pain, kidney stone, and tooth decay. To
avoid the risk of such diseases, households either buy fresh
water from the market or household members walk long
distance to collect fresh water. This means that the inci-
dence of salinity ingress can be either in the form of ad-
ditional spending in money terms or extra time allocation for
fetching better quality water at the cost of other livelihood
activities. It is considered as a defensive spending of the
households to avoid the risk of consuming saline water at
household level. The household behavior in averting the risk
of marginal quality water through defensive expenditures as
mentioned earlier indicates the extent of welfare loss due to
salinity ingress. Alternatively, it shows the extent of utility
gain if the present salinity ingress is controlled.
than a billion people in the world lack access to safe
drinking water, and 2.6 billion lack access to sanitation
facilities, resulting in widespread microbial contamin-
ation of drinking water. Deaths due to water contamin-
ation account for 6 (3.2 million) of the global deaths. The
burden of disease due to inadequate water, sanitation,
and hygiene is 1.7 million deaths and loss of more than
54 million life years.
Similarly, air pollution results in severe health im-
pacts. Outdoor air pollution is caused due to the use
of fossil fuels for electricity generation, transport, and
industry. Outdoor air pollution leads to lung and
heart diseases and is responsible for significant annual
premature mortality globally. Besides, the release of
chlorofluorocarbons (CFCs) and its consequent impact
on ozone layer depletion and global warming have
adverse impacts on health. Although outdoor pollution is
mainly limited to urban locations, indoor pollution due
to the use of solid fuels for cooking and heating in poorly
ventilated homes has significant impacts on health in
rural areas in the developing world. It is estimated that
indoor air pollution causes 1.6 million premature deaths
annually and majority of them are women and children.
Another major cause of health impacts at the local and
regional level is the air pollution caused by forest fires
and burning practices in agriculture.
Degradation of land and forest resources could cause
indirect health impacts. Land degradation could result in
food shortages and malnutrition. Land degradation was
observed to be one of main reasons for malnutrition in
sub-Saharan Africa. Worldwide, approximately 10% of
the global burden of disease is due to under/nutrition.
Forest degradation leads to outbreak of diseases, reduced
availability of natural medicines, and also results in nat-
ural disasters like floods, and land slides. Millions
of people depend on natural products from forests as
medicines. Forest degradation increases land degrada-
tion through increased runoff. Excessive runoff from
agricultural, industrial, and domestic locations results in
eutrophication of waterways excessively loaded with
nitrates and phosphates causing health hazards.
There are number of empirical studies addressing
the environment-related health problems (see ‘Further
reading’ section). Information is limited on the economic
consequences of environmental changes at any scale.
At the macro level, cost estimates of environmental
degradation in terms of human health, soil erosion, de-
forestation, and so on have shown that damage costs in
developing countries (5% of their GDP) are higher than
those in developed countries. The social cost per case
of health damage due to water pollution in developed
countries like the USA was $100, and there were ap-
proximately 1 million cases of gastroenteritis per annum
in the USA. In fact, 2 million working days are lost in the
USA due to acute gastroenteritis and diarrhea at an
average wage loss of $30 a day.
Most important and immediate consequences of en-
vironmental degradation in the developing world take
the form of damage to human health (Tables 1 and 2). It
has been found that the developing countries are facing
serious problems relating to waterborne diseases due to
lack of safe drinking water (see ‘Further reading’ section).
Waterborne diseases in Africa, Latin America, and Asia
have serious negative impact on economic activities in
the form of loss of working days, death of trained
workers, expenditure on hospitalization, and so on (see
Box 2). Diarrhea is a common occurrence in many de-
veloping countries where 3–5 million cases are reported
every year. Each case is estimated to involve a loss of 3–5
working days, amounting to 9 million working days lost
in a single year.
Industrial pollution and domestic waste seem to be one
of the most important factors causing water pollution due
to weak regulatory system and improper water and sani-
tation management (Figures 1 and 2). Industries release
effluents into the water bodies, which contain chemical
and biological matter that impose high demand on the
oxygen in the water. Apart from this, industrial wastes
contain chemicals and heavy metals like arsenic, lead,
mercury, cadmium, and zinc, which are harmful to human
health and ecosystem (Table 3). When used for irrigation
purposes, polluted water has serious impact on land
productivity. Heavy concentration of chemicals and
metals in both surface and groundwater bodies causes
serious damage to the ecology of various river systems.
The consequences of water pollution due to heavy
discharge of industrial effluents are being witnessed by
majority of the industrially booming towns. The impact of
pollution is found even in the food chain in some places.
It was estimated that 56% of the environmental costs
were borne by the agriculture sector, whereas the dam-
ages to human health and industrial sector are 20% and
18%, respectively, in Chongqing Province of China. The
 Economic Analysis of Health Impacts in Developing Countries 199

Table 1 Environmental health impacts of resource degradation

Resource Nature of degradation Direct health impacts Indirect health impacts

1. Land Soil degradation/nutrient loss –Food shortages –Loss of human productivity

–Malnutrition –Diseases associated with
malnutrition
2. Water Water pollution – industrial, –Due to consumption of and –Due to consumption of agriculture
agriculture, domestic exposure to water and livestock products
contamination of food and livestock –Psychological trauma
products
3. Forest Forest degradation – soil erosion, –Shortage of natural medicines –Impacts related to floods, land
climate change, etc. –Shortage of forest foods slides, climate change, etc.
–Malnutrition –Impacts related to degradation of
soil and water.

Table 2 Classification of water-related infections

Category Infection Pathogenic agent

Fecal-oral (Waterborne or water-washed) Diarrhea and dysenteries, amoebic Protozoa

dysentery
Balantidiasis Protozoa
Campylobacter enteritis Bacteria
Cholera Bacteria
Escherichia coli diarrhea Bacteria
Giardiasis Protozoa
Rotavirus diarrhea Virus
Salmonellas Bacteria
Shigellosis (bacillary dysentery) Bacteria
Yersiniosis Bacteria
Enteric fevers Bacteria
Typhoid Bacteria
Paratyphoid Virus
Poliomyelitis Virus
Hepatitis A Virus
Hepatitis E Virus
Leptospirosis Spirochete
Ascariasis Helminthes
Trichuriasis Helminthes
Water-washed Infectious skin diseases Fungi
Skin and eye infections Infectious eye diseases Virus
Others Louse-borne typhus Bacteria
Louse-borne relapsing fever Rickettsia
Spirochete
Water-based Guinea worm Helminthes
Penetrating skin/ingested Schistosomiasis Helminthes
Clonorchiasis Helminthes
Diphyllobothriasis Helminthes
Fasciolopsiasis Helminthes
Paragonimiasis Helminthes
Water-related insect vector Sleeping sickness Protozoa
Biting near water Filariasis Helminthes
Breeding in water Malaria Protozoa
River blindness Helminthes
Mosquito-borne diseases
Yellow fever Virus
Dengue Virus
Encephalitis Virus

following impacts were considered: In the case of agri- premature deaths, drinking water treatment, and so on,
culture, reduced quantity and quality of grains, vege- due to pollution; and in the case of industry, loss of
tables, fish, and loss of animals due to pollution; in the production due to water (quality) shortage and impact on
case of health hospital admissions, medicines, sick leaves, product quality. In India, estimates of various impacts of
200 Economic Analysis of Health Impacts in Developing Countries
industrial pollution and sewage on human health, agri-
culture and livestock, and other sectors of the economy
are made for different locations. Health damages (in-
cluding the costs of wage loss and cost of treatment) from
Box 2 Bacteriological contamination indicators
for surface waters
Bacteriological contamination of total coliform, fecal coliform,
and Escherichia (E) coli in surface water sources and
chemical contamination of fluorides, arsenic in groundwater
are common. Total coliform bacteria are commonly found in
the environment (e.g., soil or vegetation). If only total coli-
form bacteria are detected in drinking water, the source is
probably environmental. Fecal contamination is not likely.
However, if environmental contamination can enter the dis-
tribution system, there may be a way for pathogens to enter
the system. Fecal coliform bacteria are a subgroup of the
total coliform group. They appear in great quantities in the
intestines and feces of people and animals. The presence of
fecal coliform in a drinking water sample often indicates re-
cent fecal contamination – meaning that there is a greater
risk that pathogens are present than if only total coliform
bacteria are detected. Escherichia coli is a subgroup of the
fecal coliform group. Most E. coli are harmless and are found
in great quantities in the intestines of people and warm-
blooded animals. Some strains, however, may cause illness.
The presence of E. coli in a drinking water sample almost
always indicates recent fecal contamination – meaning that
there is a greater risk that pathogens are present. Confirma-
tion of fecal coliform bacteria or E. coli in a water system
indicates recent fecal contamination, which may pose an
immediate health risk to anyone consuming the water. The
main sources of contamination are domestic wastage
(sewerage), agricultural runoff, and so on. Agricultural runoff
could be a serious problem in the regions that practice high-
input intensive agriculture.
Figure 1 Wastewater and health linkages at the household level.
the water pollution in urban Delhi are about $29 per
household per year.
Economics of Environmental Health
Impacts
The main problem with environmental health impacts is
that the linkages between environment and health either
lack clarity due to complex nature of the problem or
are highly subjective. Every individual assigns different
values to environmental benefits and costs. More import-
antly, social costs and benefits differ from private costs
and benefits. The main reason for this is the public good
nature of environment, as most of the environmental
goods and services like water and air are public (social)
goods. Externalities associated with the environmental
goods further complicate the problem.
The impact of environmental degradation due to
industrial, domestic, and agricultural sectors is one of
the most classic examples of this sort. Although air pol-
lution can cause wide-ranging impacts including health
impacts, water pollution could result in direct adverse
impacts on human health, agriculture, animal husbandry,
and even industry. Environmental degradation is mainly
attributed to the failure of markets to put an appropriate
value on the environmental goods and services. Econo-
mists argue that unless environmental goods and services
are valued comprehensively in monetary terms, it would
be difficult to check degradation and achieve sustainable
development in the long run.
Weighing costs against benefits is one of the rational
and objective ways of making decisions. Trade-offs be-
tween adverse environmental impacts and developmental
 Economic Analysis of Health Impacts in Developing Countries 201

Waste water irrigation

Figure 2 Wastewater and health linkages at the farm level.

Table 3 Inorganic chemicals causing water-related diseases

Inorganic Major source Primary health effects Additional spheres
contaminant affected

Arsenic –Ore smelting, refining –Arsenic poisoning (dermatosis, Air

–Pesticides keratosis, gastrointestinal disorders,
–Geological lower limb paralysis, cancer)
Fluoride Geological Dental, skeletal and nonskeletal fluorosis
Nitrates Agricultural runoff –Nitrates - nitrite þ amines (in body) Food
Nitrites Meat preservatives yield carcinogenic nitrosamines
Nitrates can cause
methemoglobinemia in infants
Mercury –Inorganic form: Electrical goods, –Inorganic: disorders of renal system Food
chloralkali industry, burning of fossil
fuel Organic: disorders of central nervous
–Organic form: slimicides, fungicides system (CNS), numbness, impaired
speech, paralysis, deformity, and
death
Cadmium – Electroplaters, battery – Cadmium fumes, joint pain, lung, Air, food
Manufacturers kidney disease
– Possibly carcinogenic, teratogenic
Lead – Leaded gasoline, batteries –Impairs nervous system, red blood cell Air, food
–Solder, radiation shielding synthesis
–Depends on exposure
Pesticides Public health and agricultural use Contamination of human milk and tissue Food, soil, and animal
risk of breast cancer among women products

goals are unavoidable and can be addressed judiciously
when measurement is available. However, measurement
of the impacts such as on health is controversial, as it
involves some indirect costs and benefits. The extent
and intensity of environmental degradation is reflected in
the incidence of water-related health problems. Water-
borne and water-washed diseases (that occur due to
contact with water such as washing and bathing), which
include diarrhea, cholera, joint pains, viral fever, and
skin infections, are more common. Direct costs and
202 Economic Analysis of Health Impacts in Developing Countries
benefits like expenditure on health or earnings lost due
to water or air pollution are easier to measure. However,
measuring the values that people place on the indirect
costs and benefits like value of human life, psychological
trauma, and sociocultural aspects is rather difficult.
Measurement of costs and benefits due to environ-
mental changes is complex. It is difficult to value
some of the benefits such as social benefits and eco-
logical benefits. Hence, people restrict themselves to the
monetarily measurable economic benefits to the house-
holds, which are measured in terms of direct medical
expenses incurred by the households, the working days
lost due to ill health or sickness, and so on. However,
households are more concerned about tangible costs
and benefits rather than ecological and social benefits.
Although number of people sick indicates the extent
of health problems, number of days sick indicates the
intensity of the health impact. Similarly, number of
visits to doctor and the related expenditure also reflect
the intensity of the problems, as people tend to visit
doctors only in the case of severe health problems. Se-
vere sickness not only results in medical expenses but
also affects the household’s/individual’s income flows
due to their inability to work. When the sickness is
debilitating, inability to work extends beyond the days of
sickness.
Economic Applications of Health Impacts
Methods used in valuations of environmental amenities or
costs and benefits can be broadly grouped as direct and
indirect. Here, only those methods have been used that are
appropriate for this article. Financial or economic ap-
praisal methods such as CBA, cost–effectiveness analysis
(CEA), multicriteria analysis (MCA), risk–benefit analysis
(RBA), and decision analysis (DA) have not been discussed
in this article. (For details see ‘Further reading’ section).
Indirect methods, which are also known as surrogate
market valuation approaches, when information about a
marketed good is used to infer the value of a related
nonmarket good, use actual choices made by consumers to
develop models of choice for market and nonmarket
goods. These include most importantly, human capital
(HC) approach, averting cost (AC) method, travel cost
method (TCM), hedonic pricing method, and loss of
production method. However, the direct methods ask
consumers regarding their maximum willingness to pay
toward a possible change (improvement) in environmental
amenities. These methods fall under stated preference
techniques where individuals do not make any behavioral
changes but state how they would be behaving (see
‘Further reading’ section for details). The direct methods
include contingent valuation method (CVM) and contin-
gent ranking or contingent behavior. Here, the methods
that are used in valuing health costs and benefits have been
discussed. In general, the economic costs of human health
impacts due to environmental pollution consist of three
categories: resource costs (i.e., direct medical and non-
medical costs associated with treatment of the adverse
health impact), opportunity costs (i.e., the costs associated
with the loss of productivity and leisure time due to the
health impact), and disutility costs (referring to the pain,
suffering, discomfort, and anxiety linked to the illness). In
the following section, estimates for developing countries
will be presented by method.
Indirect Methods
Human Capital
The HC method purely looks at the opportunity costs,
whereas the cost of illness (COI) approach additionally
includes the resource costs.
In the context of poor water quality, households adopt
various mechanisms whereby resource costs may accrue.
Some buy water, some travel farther to fetch good quality
water, and some knowingly (due to lack of affordability)
or unknowingly consume poor quality water. The last
category of households is the subjects for HC approach
and COI approach, as they lose productive working days
and might incur other costs such as medical treatment.
In a case study in Andhra Pradesh, India, approximately
5% of the households still drink sewerage contaminated
water due to compulsions of nonaffordability or non-
availability of persons to bring water from nearby town,
and so on. Those who consume complain about stomach
pain, diarrhea, and joint pain. Women complain that the
water quality is getting worse over the years, and they are
now scared to use the water even for domestic uses.
Families consuming this water may have to spend about
$5–$8 per month toward doctor fees and medicines.
However, there are no serious health complaints of severe
sickness leading to loss of working days in the study
region. The estimated total costs of water contamination
come to $88 763 per year for the entire village (Table 4).
The incidence of sickness and inability to work due to
pollution was estimated to be between 48 and 50 days per
year in another study in Andhra Pradesh, India, where
water was polluted due to discharge of industrial efflu-
ents. The effective number of working days lost depends
on the probability of getting employment (being em-
ployed). The average loss of working days per year per
household was calculated using the market wage rate in
the villages. The estimated average loss per household
due to loss of working days was about $28. Number
of visits to the doctors before pollution and after pol-
lution and its expenditure revealed a substantial increase.
Households in the region used to visit doctors four to
five times in a year and spent $3–4 on health, but after
 Economic Analysis of Health Impacts in Developing Countries 203

Table 4 Health costs of water pollution accruing to households (HH) using various methods in Bommakal Village, Andhra Pradesh,
India
Indicator No. of HH Economic cost per household per year Total cost per year (US$)
(US$)

No. of HH buying water (averting cost) 20 95 2000

No. of HH fetching water from town 900 900 at each HH spends an hour per day 86 447
(travel cost) in fetching water and the wage rate is
US$ 0.30 per hour (Total: $270)
No. of HH drinking contaminated water 80 6 (medical expenses) 421
(human capital)
Total 1000 196 88 868

Source: WSP (2008) Adapting to climate variability: Productive use of domestic wastewater as a risk management option in peri-urban regions. Draft
report, Water and Sanitation Programme. New Delhi: The World Bank.

Table 5 Impact of water pollution on human health in Andhra Pradesh

LF MdF SF MF All

Average number of days sick and unable to work/household/year 42 33 24 27 28

Loss due to loss of employment (in $) 42 33 24 27 28
Average number of visits to doctor/household 10 20 13–14 17 14–15
Average amount spent on (Rs) medical/household (in $) 60 40 19–28 26–33 33–40

Note: LF ¼ large farmers; MdF ¼ medium farmers; SF ¼ small farmers, and MF ¼ marginal farmers.
Source: Reddy VR and Bhagirath B (2006) Impact of water pollution on rural communities: An economic analysis. Ecological Economics (Elsevier)
58(3).

pollution it has increased substantially in the effected
villages. This has an adverse influence on the socio-
economic conditions of the people in the effected vil-
lages. Expenditure on health depends on two factors:
(1) the severity of diseases and (2) the economic con-
dition of the family. Small and marginal farmers (owning
less than 2 hectares of land) visit doctors 20 times per
annum, and their expenditure on medical services is $30.
However, in case of medium (owning between 2 and 5
hectares of land) and large (owning above 5 hectares of
land) farmers the average number of visits to doctors is
25 and 12 and the amount spent on medical expenses is
about $40 and $60, respectively, after pollution (Table 5).
These differences can be attributed to the two factors
mentioned earlier. For example, large farmers often
prefer to go to the doctors in towns who are more ex-
pensive than the local doctors and these doctors may also
prescribe expensive medicines.
HC approach was used in a case study of Chongqing
region, China. Three components of COI were con-
sidered, namely, medical treatment, loss of work, and
premature death. Three diseases linked to contaminated
water, that is, hepatitis, dysentery, and selected cancers,
were taken for estimating the costs. In the case of pre-
mature death, losses of earning during the working age
18–60 due to death were estimated. A median age of the
patients to die is estimated at 53 years; hence the cancer
patient loses 7 years of working life. Individual contri-
bution to production is estimated using the per capita
growth (8%) and a discount rate of 12%. The total loss
Table 6 Household-level direct and indirect costs of fetching
water and the willingness to pay for water in Rajasthan, India
Parameter Value
1. Mean distance from source (in meters) 619
2. Time spent in fetching water (hours/day) per family 18
3. Percentage of households buying water 24
4. Mean expenditure on water (US$/day) 1.1
5. Willingness to pay for regular public water supply 0.60
(US$/month)
Source: Reddy, VR (1999) Quenching the thirst: The cost of water in
fragile environments. Development and Change 5(1): 79–113.
due to health damage was estimated at $21.7 million in
the region when HC approach was used.
Averting Costs
AC approach states that to avoid the damage due to
environmental degradation, one has to spend some
money. Following this approach, a study was carried out
in Andhra Pradesh, India. It was observed that approxi-
mately 2% of the households buy water from market to
avoid adverse health impacts. The estimated cost of this
averting behavior is estimated at $95 per household per
year (Table 4). In the arid regions of Rajasthan, almost a
quarter of the total households buy water from market
and spend more than $1 per day per household, that is,
$365 per annum (Table 6). Water treatment costs were
estimated at about $0.9 million in the Chongqing region
of China.
204 Economic Analysis of Health Impacts in Developing Countries

Travel Cost Method them. The money is calculated in terms of the price
times the quantity of water/fuelwood consumed per day.
TCM uses peoples’ actual behavior and hence captures
In other words, the values of water/fuelwood if pur-
the actual use values. Travel cost methods are based on
chased at market price (even if the household is not
an extension of theory of consumer demand, with specific
actually purchasing them in the market). Health costs
reference to value of time. This method, which is the
of using poor quality of water can be estimated if
most straightforward of the indirect methods, recognizes
households have access to two sources with different
that visitors to a recreation site pay an implicit price –
source characteristics in terms of quality, time/money
the cost of traveling to it, including the opportunity costs
spent. For instance, the extra effort put in/amount spent
of their time. Athough this method is often used to es-
by households for collecting/buying good quality water
timate the willingness to pay for the facilities of a site
is the value households place on health. One problem
using information on time people spent on getting to a
that may arise here is the existence of some kind of
site, a modified version of this method can be used to
markets for these items. It may be difficult to find markets
estimate the value of time. This method (random utility
for drinking water and fuelwood in all the regions,
theory approach) is based on the assumption that the
especially for drinking water. Another problem here may
households’ source choice decisions depend on at least
be the large variations in tastes, availability of alternative
two sets of explanatory variable: (1) source attributes,
sources, incomes, and so on, which can be taken care
which affect the households’ utility and (2) household
of with appropriate econometric techniques. However,
characteristics, which reflect difference in tastes and
various other problems related to TCM are not con-
preferences. According to random utility theory, the
sidered here. On the whole, TCM is believed to be a
probability that household ‘h’ chooses alternative source
useful tool and found to have worked well in different
‘j’ equals the probability that the utility derived from
contexts.
using source ‘j’ is greater than the utility derived from
Greater proportion of households resort to fetching
any other alternative. Following this framework, utility
water from far off places to avoid the ill effects of poor
function is estimated with two sets of variables, that is,
quality water mainly due to their poor economic status in
source attributes and household characteristics.
the developing countries. Villagers go to nearby towns to
The functional form is as follows: fetch water from municipal supplies. Studies observed
that households spend an hour per day to bring two
Uih ¼ f [Xih, Z1 h] cans of water (approximately 40–50 l), and in summers it
becomes worse as they spend 2–3 h per day two bring
where Uih is utility derived by household ‘h’ using a same amount of water. Approximately 80% of the
source site i. Here, utility is indirectly determined by the households resort to this mode and the estimated costs
choice of the source (site). Xih represents source attri- are $270 per household per year (Table 4). In arid
butes like distance between source and household, time regions, the travel time tends to be substantial, that is,
spent, and money paid for collecting water. Z1 h repre- 18 h per day per household (Table 6). Often these travel
sents household characteristics like income, social status, costs are not accounted as the opportunity costs of labor,
education level, and preferences. especially for women and children (the main fetchers of
In this model, the dependent variable (Source/site) is water), tend to be zero in some rural areas of developing
a dichotomous variable, and hence it is estimated with countries.
the help of conditional logit model. (Conditional logit is
used to deal with the data structure, which includes both
Direct Methods
groups of independent variables – source attributes vary
across sources whereas household characteristics do not
The most important and widely used method in direct
vary across sources.) This model is found to be useful in
methods is the CVM. Of late, researchers have also
estimating the household’s value of time, and hence
employed contingent ranking or contingent behavior to
suitable for adaptation in the context of valuation of re-
estimate the individual’s willingness to pay for environ-
sources. Two clear cases of such adaptation are drinking
mental amenities. Despite numerous criticisms leveled
water and fuelwood where rural households spend sub-
against it, a reasonable degree of success and persistence
stantial amounts of time in fetching/hauling them. In this
led to increasing attention on CVM findings.
(conditional logit) model, the value of time spent by the
household is given by the ratio of the two coefficients
Contingent Valuation Method
measuring time and money spent for water or fuelwood
by the household. Here, the value of time is defined as CVM elicits how people would respond to hypothe-
the marginal rate of substitution between the time spent tical changes in some environmental resources. CVM
in collecting water/fuelwood and money paid for deploys direct valuation questions relating to individual’s
 Economic Analysis of Health Impacts in Developing Countries
Table 7 Willingness to pay water (per can of 20 l)
(% households)
Costs in $ Per 12 l Poor
Capital Costs
Upto $ 0.75 80
Above $ 1 20
User Charges 100
User Charges as % to income 4.8
User Charges as % to expenditure 4.5
Source: Reddy VR, Kullappa M, and Mohan Rao D (2008) Social cost-
benefit analysis of improved water quality in rural areas: An exploratory
study in coastal AP (jointly). Journal of Social and Economic
Development 10(1).
willingness to pay for certain environmental changes.
The concept of willingness to accept is less preferred as it
is observed to be not reflecting the true picture – often
found to be giving overestimates when compared to
willingness to pay estimates. Given the poor quality of
drinking water, for instance, households are willing to pay
(WTP) for improved water quality. In a study of six
villages, not a single household has expressed ‘no’ to the
WTP question for the provision of quality water by a
private firm. This is true for both capital costs and
membership fee. Here market prices, in the case of
running costs, and a minimum one-time fixed amount, in
the case of capital costs, are used as payment vehicles,
which is fixed at a nominal level and user charges. Ma-
jority of the poor households are willing to pay $0.75 and
above as membership fee, whereas majority of the non-
poor households are willing to pay $1 and above
(Table 7). In the case of user charges, all the households
are willing to pay the present rate of $0.038 per 12 l. Most
of the households prefer home delivery of water and they
are willing to pay extra for the transport. Among the
nonpoor households, 82% are willing to pay extra (i.e.,
$0.063/12 l). In the case of poor households, only 52%
are willing to pay this price. The differences between
poor and nonpoor households in the WTP bids are due
to the differences in ability to pay. Ability to pay is
examined by looking at the household income and ex-
penditure figures. As a proportion of household incomes,
poor households are willing to pay 4.8% against 0.93% in
the case of nonpoor households. This is quite substantial
by any standard, as it is often assumed that households
are willing to pay up to 3% of their income. In terms of
expenditure also, poor households are willing to pay
more than their counter parts (Table 7). It is also ob-
served that willingness to pay for public provision of
drinking water is often lower when compared to private
supplies ($0.6 per month versus $1.1 per day, respectively,
see Table 6). This is mainly due to lack of trust in public
utilities in the developing countries.
It is observed that the willingness to pay estimates are
often on the higher side when compared to the HC
205
approach. A comparison of these two methods in the
Chongqing region of China revealed that WTP estimates
Nonpoor are more than three times higher than that of the esti-
mates from HC approach, which is mainly attributed to
40 the incidence of cancer due to water pollution in this
60 region. In other words, people are adding the cancer
100 premium to the WTP responses. The difference in es-
0.93
3.5
timates could be due to the reason that WTP estimates
often include nontangible/noneconomic costs, namely,
social, psychological and aesthetic values.
Conclusions
Economic analysis of health impacts assumes importance
in the context of market failures or distortions. This is
mainly due to public good nature of the resources and
the externalities associated with the resource. Environ-
mental economics provides appropriate methods and
methodologies to overcome most of these issues. One way
to overcome the problems of market failure is to enforce
property rights. However, in many externality-type
situations, the cost of enforcing property rights is found
to be high and difficult to enforce. The problem is acute,
especially, when it comes to the environmental problems
related to pollution. Theoretically, it is true that air
and water pollution problems arise mainly because the
atmosphere and watercourses are not and cannot be
privately owned. It means each individual/organization
has no incentive to take into consideration the effects of
his use on other individual/organization. In the case of
negative effects of pollution, the social cost, which is
equal to the sum of the costs to all individuals (including
any kind of valued disutilities), is greater than the private
cost to the individual using air and water for waste
disposal. The implication of this is that an individual or
economic agent does not take into account the societal
costs while making decision on how much to dump in to
the environment.
The crux of the problem lies with how to internalize
the externalities by taking the social costs into account.
Certain policy instruments such as command and control
(CAC) and economic instruments would help in the
process. These policy instruments require political will
and institutional strength to implement them. However, it
is seen that the government often fails to implement such
policies in developing countries like India due to various
economic and political compulsions. Some argue that
Coase’s theory of costless collective bargaining among
the relevant agents can be an alternative. However, Coase
theorem does not seem to work in the real life as far as
environmental goods and services are concerned. The
main drawbacks associated with Coase theorem are that
of uncertain externalities and large number of economic
agents involved. When the number of agents (polluters
206 Economic Analysis of Health Impacts in Developing Countries
and victims) is large, it is quite impossible to bring
them together without transaction costs for bargaining.
The failure of negotiations between local communities
and industries pertaining to effluent discharge into water
bodies in Andhra Pradesh, India, is attributed to the large
and diverse (economically heterogeneous) group of vic-
tims. The compensation package offered by the indus-
tries was much lower than the actual damages. Although
the compensation was not acceptable to the communities,
a large portion of the community (small and marginal
farmers) could not join the negotiations or agitation for
better compensation. Their poor economic status forced
them to look for alternative livelihoods. In fact, some of
them were employed in the polluting industries.
However, economic and institutional measures could
help in addressing the problems to a large extent. Eco-
nomic measures, when used properly, would help in re-
flecting the real value of the goods and services. However,
valuation of environmental impact is very much essential
for designing appropriate economic measures. Environ-
mental damages impose costs on societies that are not
reflected in market prices, need to be valued to compare
the benefits of environmental protection with the costs of
remedial action to make better policy decisions. Quan-
tifying the impact of environmental damages can provide
a more secure basis for policies (e.g., taxation, charges,
and subsidies) to induce more careful environmental use.
See also: Water-Related Diseases in the Developing
World.
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Relevant Websites
http://www.millenniumassessment.org/documents/document.
291.aspx.pdf
World Health Organization, Ecosystems and Human Well-Being:
Health Synthesis, Millennium Ecosystem Assessment.