Theory:

But before he had opened his wings, a third drop fell, and he looked up, and saw — Ah! What did he see?

The eyes of the Happy Prince were filled with tears, and tears were running down his golden cheeks. His face was so beautiful in the moonlight that the little swallow was filled with pity.

“Who are you?” he said.

“I am the Happy Prince.”

“Why are you weeping then?” asked the swallow. “You have quite drenched me.”

“When I was alive and had a human heart,” answered the statue, “I did not know what tears were, for I lived in the Palace, where sorrow is not allowed to enter. My courtiers called me the Happy Prince, and happy indeed I was. So I lived, and so I died. And now that I am dead they have set me up here so high that I can see the ugliness and all the misery of my city, and though my heart is made of lead yet I cannot choose but weep.”
Explanation:
 
Before the bird started to open his wings to fly, the third drop of water fell on him. Then the narrator exclaimed and said, "Ah! What did he see". When the swallow raised his head, he noticed the statue's eyes were filled with tears. These drips of water were the teardrops dropping from the prince's golden cheeks. When the swallow glanced at it, the face of Happy Prince seemed lovely in the moonlight. On seeing the weeping face of the statue, the little bird's heart filled with empathy. Later, the swallow questioned him about who he was. After hearing the swallow's question, the statue replied that he was 'Happy Prince'.
 
After knowing the statue was "Happy Prince," the swallow asked him why he shed tears. The reason behind the statement was that the statue introduced him as "Happy Prince, so the swallow thought he would be a cheerful prince. In addition, the swallow said that the Happy Prince had wet him thoroughly with his tears.
 
Later, the Happy Prince narrated his story to the swallow. The Happy Prince stated that while he was alive and had a human heart, he had no idea what tears and sorrow were because he lived in a palace where bliss was all around him. His courtiers used to call him Happy Prince since he was always cheerful and had never known grief. Furthermore, he said that he only lived and died in happiness.
 
After the death of the Happy Prince, people erected his statue at a point where he could see the entire city and its ugliness. He could see many people suffering from lack of food, hunger, money, and homelessness. The Happy Prince then confessed that his heart was made of lead and that all he could do was cry. It indicates that he was unable to help the people after witnessing their difficulties.
 
Meanings of the difficult words:
 
S.No
Words
Meanings
1
Tears A drop of salty liquid that flows from the eye, as a result of strong emotion, especially unhappiness, or pain
2
Moonlight The pale light of the moon
3
Alive Of a person, animal, or plant living, not dead
4
HeartThe organ in your chest that sends the blood around your body; also, the centre of a person's thoughts and emotions, especially love, passion, or loyalty
5
Sorrow A feeling of deep distress caused by loss, disappointment, or other misfortune suffered by oneself or others
6
Ugliness The quality of being unpleasant or repulsive in appearance
7
Misery Great unhappiness
8
WeepShed tears
Reference:
National Council of Educational Research and Training (2006). Moments. The Happy Prince – Oscar Wilde (pp. 28-35). Published at the Publication Division by the Secretary, National Council of Educational Research and Training, Sri Aurobindo Marg, New Delhi.