A DISSERTATION SUBMITTED IN PARTAIL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER OF SCIENCE IN ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS OF SOKOINE UNIVERSITY OF AGRICULTURE. MOROGORO, TANZANIA.The study was done to determine the willingness to pay (WTP) for improved watershed services by downstream water users in Babati District using contingent valuation method in the form of close and open-ended WTP questions. Specific objectives were (i) to assess the level of awareness of the downstream water users on the importance of watershed in the provision of sustainable water supply (ii) to estimate willingness to pay for watershed services by the downstream users (iii) to analyse factors that affect willingness to pay (iv) to examine the possible operational mode for instituting the payment of watershed services mechanism. A cross sectional research design was adapted for this study. Both primary and secondary data were collected from Babati District. Purposive and random sampling techniques were used to obtain respondents who comprised of 155 domestic water users and 50 non-domestic water users. The data was analysed using descriptive and inferential statistics. The results indicated that more than 50% of both water users have awareness on the importance of watershed in the provision of sustainable water supply. Also 71% of domestic water users and 82% of non-domestic water users are willing to pay for improved watershed services with mean WTP of TAS 1 261 per user/year and TAS 112 322 per user/year respectively. The factors that significantly influence water user’s WTP include gender, occupation, education and farm size. Income is significant for non-domestic water users, however it appeared to be insignificant for the case of domestic water users. The study reveals that, the preferred basis of charging and collection mechanism of the watershed management and protection fee for both users was the same amount of payment and a separate agency/office to collect the fee. The study suggested that the amount respondents are willing to pay may serve as base for water user fee that may be collected from downstream water users in Babati district as buyers of watershed services.