Exergy and thermo-economic cost analysis are increasingly important tools for the evaluation of a desalination system’s performance and hence economic viability of the method for industrial or commercial applications. Membrane distillation (MD) is one important water desalination method that is still under development, not well established and not yet widely used in industries unlike reverse osmosis (RO). In this study, an exergetic and thermo-economic analysis for a large scale pilot plant air-gap membrane distillation system have been done. Experiments were carried out to get thermodynamic values of water streams. From the experimental data obtained and followed exergy analysis, it was found that the least exergetic efficiency (75%) was obtained for the feed. Maximum exergy efficiency was obtained for the hot side heat exchanger (98%) followed by the pumps. Thermo-economy of the MD water desalination under investigation was also analyzed and compared with other water desalination methods. Finally, the thermo-economic optimization for the MD system under consideration was investigated, and performance improvements were discussed.