Empirical assessment of relationships between land use and land cover and drinking water chemical treatment cost is lacking in developing countries. This study is conducted to assess the impact of forest and non-forest cover on water purification chemical costs in Ethiopia. A panel fixed effects regression model was applied and analysed at the watershed, upstream parts of the watershed, and different buffer distances ranging from 2.5 to 30 kilometers. Findings indicated that forest cover both at watershed and upstream level has a significant effect on water treatment chemical cost. Result showed that watershed forest cover contributes significantly to reduction of treatment chemical costs as compared to non-forest cover, but the contribution to the reduction of treatment cost declines as the buffer distance increases. Thus, the findings highlighted that protecting forest enhances water quality and reduces the chemical costs incurred to treat potable water.