About 271.6 million cubic meters of water resource are conserved by forest at Feitsuey reservoir watershed. The conservation cost per cubic meter estimated to be NT$ 0.9714 by growth rate, and NT$ 0.6410 by growing stock. This cost is usually excluded in water price collected. This might cause inefficient use of water resource and mislead water resource allocation. This paper introduces the target cost for forest conservation into urban water demand function and calculates its efficiency changes. Results indicate that changes in the consumer's welfare per household is NT$ 228.2189 in compensation variation, and NT$ 197.8266 in equivalent variation. If using the concept of willingness to pay of the households, the compensation variation is NT$ 257.1285, and the equivalent variation is NT$ 227.6968. Efficiency losses in two methods per household are NT$28.9096 in compensation variation, and NT$29.8702 in equivalent variation. Total social welfare changes per year are between 1.83 and 0.98 billion N.T. dollars, and efficiency loss is between 0.136 and 0.213 billion N.T. dollars.
Key words: growing-stock method, willingness to pay, compensation variation, equivalent variation.
Correspondence: Kouchung J. Lee, Department of Forestry, National Taiwan University, Taipei, China-Taipei