This study was carried out in three districts i.e Peshawar, DI Khan and Mansehra of Khyber Pakhtunkhwa during the year, 2010 with the basic objective to determine the economic efficiency of milk production in the mentioned areas. The data from 300 livestock farmers (100 from each district) was collected by using multi-stage sampling technique. Descriptive statistics, stochastic frontier production function and cost function were used for determination of economic efficiency. Major determinants impacting economic efficiency of milking animals i.e herd size, dry fodder, green fodder, use of concentrate/oil seed cake, hired labor, permanent labor, medicine and vaccination cost and fees were studied. The results of descriptive statistics show that the average yield per day in case of buffalo, cow and goat were 6.71, 6.02 and 1.16 liters respectively. The average cost of milk production per annum per buffalo, cow and goat was found to be Rs. 20017, Rs.16092 and Rs.1321 respectively, while the revenue obtained by an average milk producer per buffalo, cow and goat was estimated as Rs. 26700, Rs. 23067 and Rs. 631. The results further revealed that 70% of the total variation in milk production of an average farmer was due to farmer specific technical inefficiency and the remaining differences were due to random error (i.e uncontrolled variation between observed and predicted values). Similarly, in terms of allocative efficiency, the results show that approximately 77% of the variation in the total cost of production among the farmers was due to the presence of alocative inefficiency. The results of the study show that rising age of livestock farmers was cause of decline in the efficiency and is recommended that the Government policy should focus on ways to attract and encourage young people who are agile and aggressive in dairy business. The study also recommends that buffalo are emerging as more efficient milk producing animal viii than cow in Khyber Pakhtunkhwa, both economically and environmentally, therefore they should be given attention in the future strategies for promoting milk production and income of people in this province. Results of the study revealed that farmers having more experience are more efficient than those having comparatively less or no experience. It is, therefore, recommended that Livestock Association should be introduced at village level so that the expert farmers may share their experience with less experience farmers to enhance efficiency. Finally more focus should be given on education as high level of education of farmers have positive affect on their technical efficiency, therefore Government should plan policies to attract more educated people in livestock farming by providing more incentive for education. It is also recommended that livestock graduates should be offered credit for establishment of dairy farms and the credit should be on soft term and condition and returnable after ten years.