Quantifying welfare effects in the presence of externalities: An ex-ante evaluation of sanitation interventions

This paper analyzes the impact of externalities on household demand for sanitation and the subsequent welfare effects generated from policy interventions. A critical feature of household sanitation (e.g., toilets) is that the take-up generates externalities where the privately chosen level is less than the socially optimal. To analyze the impact of policy interventions, I explicitly model household choice, taking into account the interdependence of household decision-making within the village. I identify and estimate the model using micro-survey data from India. Using the estimated model, I show how untargeted price subsidies, although cost effective at increasing sanitation coverage, have a regressive effect. I contrast this policy response with a targeted cash transfer to households with children, which ameliorates the regressive impact at the expense of a lower take-up.