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Public policy has often addressed the problems of water supply and sanitation from the supply side to the neglect of demand side aspects in developing countries like India. This policy has not only rendered a large number of projects financially unviable but has also resulted in inadequate coverage of aspects such as population and ecological unsustainability. This article, based on household level information from six villages in a water scarce region of India (Rajasthan state), examines inter- and intra-village variations in water use and the costs, direct and indirect, involved in obtaining water. It also estimates households' willingness and ability to pay for water, using the contingent valuation method (CVM). Using qualitative as well as quantitative methods, it is argued that it is the failure of government policy and of institutions which has led to severe water shortages in harsh environments rather than supply or financial bottlenecks per se. While the estimates of price elasticity of water use indicate the feasibility of water pricing in the rural areas, the willingness to pay estimates question the general assumption that rural households are willing to pay 5 per cent of their income/expenditure for water. Various economic and extra economic factors such as household income, low opportunity costs of women and children, and attitudes towards female labour and public goods are vital in influencing the households' willingness to pay for water. [ABSTRACT FROM AUTHOR]