Impact of water pollution on rural communities: An economic analysis V. Ratna Reddy a, * , Bhagirath Behera b,1 a Center for Economic and Social Studies, Nizamia Observatory Campus, Begumpet, Hyderabad 500 016, India b Center for Development Research (ZEFb), University of Bonn, Walter-Flex-Str.3, 53113 Bonn, Germany Received 8 December 2004; received in revised form 30 May 2005; accepted 27 July 2005 Available online 7 November 2005 Abstract This paper assesses the economic costs of water pollution (industrial) in the rural communities in terms of losses to agricultural production, human health, and livestock. The cost estimates are based on the detailed primary (household level) data collected from an intensive study of two villages–one a pollution-affected village and another control (not affected by pollution)–located in one of the industrial belts in Andhra Pradesh, South India. The cost estimates revealed that the impact of industrial pollution on rural communities is quite substantial in monetary terms. The paper argues that the compensation principle might work if the estimates of damage are realistic. Further, mere passing of laws and creating institutional structures are necessary but not sufficient to address the environmental problems. Policies should be implemented in their right perspective. Institutions should be strong enough, with more autonomy and powers, to deal with the problems at hand. D 2005 Elsevier B.V. All rights reserved. Keywords: Environment; Water pollution; Costs; Impact; Rural communities; Andhra Pradesh; South India 1. Introduction An important dimension of water resources that has not received due attention is its quality aspects. The rapid industrialization in developing countries, though contributed to economic development, has resulted in heavy losses to economic welfare in terms of effects on agricultural activities, human health and ecosystem at large through air and water pollution. Basically water pollution poses a serious challenge due to its impact on a large num- ber of economic activities. The problem of water pollution acquires greater relevance in the context of an agrarian economy like India. While the magni- tude of the problem is limited and widely spread, the losses due to its impact are quite substantial. This is mainly due to its direct impact on human health and livelihoods. 0921-8009/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2005.07.025 * Corresponding author. Tel.: +91 40 23416467; fax: +91 40 23406808. E-mail addresses: vratnareddy@cess.ac.in (V.R. Reddy), bhagirath _ b@yahoo.com (B. Behera). 1 Tel.: +49 228 731728.