Membrane distillation (MD), which can utilize low-grade thermal energy, has been extensively studied for desalination. By incorporating solar thermal energy, the solar membrane distillation desalination system (SMDDS) is a potential technology for resolving energy and water resource problems. Small-scale SMDDS (s-SMDDS) is an attractive and viable option for the production of fresh water for small communities in remote arid areas. The minimum cost design and operation of s-SMDDS are determined by a systematic method, which involves a pseudo-steady-state approach for equipment sizing and dynamic optimization using overall system mathematical models. Two s-SMDDS employing an air gap membrane distillation module with membrane areas of 11.5 m(2) and 23 m(2) are analyzed. The lowest water production costs are $5.92/m(3) and $5.16/m(3) for water production rates of 500 kg/day and 1000 kg/day, respectively. For these two optimal cases, the performance ratios are 0.85 and 0.91; the recovery ratios are 4.07% and 4.57%. The effect of membrane characteristics on the production cost is investigated. For the commercial membrane employed in this study, the increase of the membrane mass transfer coefficient up to two times is beneficial for cost reduction.