Management of solid waste is a growing problem in Sri Lanka. At present the crucial problem faced by Local Authorities (LAs) is not merely the increase in rate of waste generation but also the haphazard disposal practices. Open dumping of solid waste has been the most common disposal practice in Sri Lanka, which is associated with the highest environmental, health and social costs compared with other improved disposal methods. Analysis of the composition of waste stream in Sri Lanka reveals that over 80 per cent domestic and commercial solid waste is organic and biodegradable and therefore is suitable for compost production. In addition, climatic conditions of the country also are optimum for composting practices. Moreover, compost could be used to improve the productivity of agricultural lands as the major proportion (44 per cent) of agricultural lands in Sri Lanka face the problem of low productivity due to soil erosion. In the backdrop, this study attempts to understand the economics of composting practices in the Western Province of Sri Lanka. Data was collected from compost plants (recently operated and currently operating) in the Western Province, a sample of local authorities and also from other stakeholders such as compost sellers and buyers and experts. Financial Cost Benefit Analysis and Social Cost Benefit Analysis were carried out for each compost plant selected. Findings of the study reveal that the composting practices in Sri Lanka are not financially viable as the financial benefits currently drawn from the composting are less than the costs incurred. This is mainly due to the fact that marketing opportunities available for composting are not lucrative. However, composting can help to overcome substantial environmental costs that take place due to alternative ways of waste disposal, particularly due to open dumping. Therefore, the study argues that in the short-run, the loss for compost producers should be compensated by local authorities as properly controlled composting helps to minimize the social cost involved with poor solid waste management. However, development of sustainable markets for compost products is also essential for the long-term survival of the industry. The study also discusses economic instruments which can be used for revenue generation and cost recovery by local authorities in relation to the solid waste management.