Abstract Background The aim of this study was to analyse willingness to pay (WTP) and ability to pay (ATP) for ACT for children below five years of age in a rural setting in Tanzania before the introduction of artemisinin-based combination therapy (ACT) as first-line treatment for uncomplicated malaria. Socio-economic factors associated with WTP and expectations on anti-malaria drugs, including ACT, were also explored. Methods Structured interviews and focus group discussions were held with mothers, household heads, health-care workers and village leaders in Ishozi, Gera and Ishunju wards in north-west Tanzania in 2004. Contingent valuation method (CVM) was used with "take-it-or-leave-it" as the eliciting method, expressed as WTP for a full course of ACT for a child and households' opportunity cost of ACT was used to assess ATP. The study included descriptive analyses with multivariate adjustment for potential confounding factors. Results Among 265 mothers and household heads, 244 (92%, CI = 88%–95%) were willing to pay Tanzanian Shillings (TSh) 500 (US$ 0.46) for a child's dose of ACT, but only 55% (49%–61%) were willing to pay more than TSh 500. Mothers were more often willing to pay than male household heads (adjusted odds ratio = 2.1, CI = 1.2–3.6). Socio-economic status had no significant effect on WTP. The median annual non-subsidized ACT cost for clinical malaria episodes in an average household was calculated as US$ 6.0, which would represent 0.9% of the average total consumption expenditures as estimated from official data in 2001. The cost of non-subsidized ACT represented 7.0% of reported total annual expenditure on food and 33.0% of total annual expenditure on health care. "Rapid effect," "no adverse effect" and "inexpensive" were the most desired features of an anti-malarial drug. Conclusion WTP for ACT in this study was less than its real cost and a subsidy is, therefore, needed to enable its equitable affordability. The decision taken in Tanzania to subsidize Coartem^® fully at governmental health care facilities and at a consumer price of TSh 300–500 (US$ 0.28–0.46) at special designated shops through the programme of Accredited Drug Dispensing Outlets (ADDOs) appears to be well founded.