The increase in residential water demand is a challenging issue for the world and for Oman specifically as it is located in an arid region. Oman has continuously increased water supply through desalination to fill the rapid increases in water demand. However, no significant effort was done to manage the demand. The desalination is considered expensive option in solving the increase in water demand compared to water demand management. Thus, to manage the consumers demand, it is important to conduct a research to study the demand for water and the factors affecting its consumption. Therefore, this study estimates the water demand function in Muscat Governorate and identifies the main factors that affect water consumption. The data used in the study was generated from a household survey conducted at Al-Seeb and Al-Qurum of Muscat Governorate counting 266 households. The dependent variable used in the analysis is the average monthly household water consumption and the independent variables are household income, number of residents, number of potted plants in the garden, presence of swimming pool, frequency of car washing, presence of modern irrigation system and the size of irrigated area in the garden. Alternative econometric models were used to estimate the residential water demand. The econometric models used in the study are two stage least squire (2SLS) and lagged average price model. Results showed that the water users react to the lagged average price rather than the current average price. The findings of the study are consistent with results reported in the literature. The price and income are significant variables in determining the demand for water. The other variables included in the model such as number of home residents, number of potted plants in the garden, presence of swimming pool and the frequency of car washing are significant variables in determining water demand in Muscat Governorate. The demand for water is price elastic. The price elasticity was estimated to be -2.1. This is expected, since part of the water users uses the water for outdoor purposes such as gardening, swimming and washing their own cars. Most of the consumers don't use the tap water for drinking; they tend to buy bottled water for drinking purposes. The income elasticity is estimated at 0.04 showing that the demand for water is income inelastic. The findings indicate that managing demand for water in Muscat Governorate through economic instruments (eg: increase the price) is recommended, besides to increasing water supply through desalination.