| Summary: | The main objective of this paper is to determine the cost structure of the companies in charge of water production and distribution and to estimate the marginal cost of production of drinking water in Tehran. For this purpose, the Translog cost function is used to estimate the cost of production, transmission and distribution of water in Tehran Water and Wastewater Company. Analysis framework is based on a seemingly unrelated regression system. Time series data for the period of 1997-2012 has been used in this study. The results indicated that the labor, raw materials and other services inputs are substitute sand labor and capital inputs are complements. Results also showed that product cost elasticity is greater than unit and a diminishing returns to scale exists in Tehran Water and Wastewater Company. Finally, by using the calculated parameters and objective of minimizing the total cost of production, transmission and distribution of drinking water, the optimal production capacity in drinking water is calculated for Tehran. The results showed that, the optimal production capacity in Tehran drinking water is 376.15 MCM per year.
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