This paper provides an analysis of public policy relating to the rural water supply sector in the Punjab, Pakistan. Based on household survey data, it shows that rural water policies have not kept pace with the rapid economic development in this region and that in the absence of adequate public investment households find private sector alternatives to meet their water needs, often at high economic and environmental cost. Using the contingent valuation method for benefit estimation, it is also shown that household willingness to pay for reliable improved services is much higher than assumed. In fact, full cost recovery is quite feasible in many areas of the Punjab. It is recommended that rural water sector strategy be changed from a centralized, supply-oriented focus to a decentralized, demand-oriented policy. ¿ American Geophysical Union 1993