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Large quantities of financial and human resources have been devoted to improving rural water supplies in developing countries over the past two decades. Many projects have been successful, but many have failed to meet the needs of the intended beneficiaries. Evidence of the failures lies in the unused and poorly maintained systems that are scattered throughout rural areas of the developing world. The current situation in water supply in rural Kerala, India, reflects this general observation and can be described as a “low‐level equilibrium trap.” Water systems provide a low level of service with few yard taps. The monthly tariff for water from household connections is low. With few connectors and low tariffs, little revenue is generated beyond subsidies provided by the government. The water authority can afford to maintain the system up to a level at which the reliability of service is low, forcing consumers to supplement piped water from traditional sources. This study analyzes contingent valuation data collected in three areas of Kerala to evaluate the possibility of lifting the system out of this trap. The analysis shows that by making a few critical policy changes, encouraging private connections and financing those connections through higher tariffs, the system can ratchet up to a “high‐level equilibrium” in which there are many connectors, monthly revenues are greatly increased, and consumer welfare improves. Such a system would be better financed, making it possible to improve the reliability and quality of the service.

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