Water utilities in developing countries face a challenge in maintaining the existing supply and extending the supply of pipe-borne water to rural areas in face of growing demand. Understanding the cost structure is important for developing the pricing policies, regulating the market structure and ensuring the financial viability of the supply of pipe-borne water. This paper investigates economic parameters of water supply in Sri Lanka, which exhibits the common physical and institutional features of water sector in Asian countries. The estimated marginal cost of water supply of Sri Lankan rupees (SLRS) 16.50 per cubic metre in the short run, rising to SLRS 47.25 in the long run, suggests that water is under-priced under the current pricing regime. We find existence of economies of scale as well as significant substitution possibilities between inputs. Thus, under correct tariff regime, there is a scope to accelerate the expansion of water supply.