According to latest release from the U.S. Department of Energy – Energy Information Administration (EIA), the average residential monthly electric bill was $110.21 in 2013. The most expensive utility bill for homeowners is the electric bill, accounting for roughly 9% of expenditure on housing according to NAHB tabulations of Bureau of Labor Statistics (BLS) data on consumer expenditures. The average monthly electric bill varies widely by state. In the contiguous United States, the West South Central states (Arkansas, Louisiana, Oklahoma, and Texas) had the highest average monthly electric bill at $126.75, while the Pacific states (California, Oregon, and Washington) had the lowest at $90.84. The state with the highest average monthly electric bill was Hawaii at $190.36 or nearly 2.5 times the average electric bill in New Mexico. New Mexico was the state with the lowest average electric bill in 2013 at $76.56. Variation in the monthly electric bill by state is function of consumption and pricing for which EIA also provides estimates.

The EIA is the government agency responsible for the collection and dissemination of energy information. small ac unitEIA conducts an annual survey of the electrical power industry. how to tell the size of a ac unitResults from the survey are used to estimate the average residential monthly electrical bill, average monthly consumption, and average monthly price by state. ac units for mobile homeA direct link to the 2013 statistics is provided below. 2013 Average Monthly Bill – Residential Electric In 2013, the state with highest average monthly consumption was Louisiana at 1,273 kilowatt hours. The state with the lowest average monthly consumption was Hawaii at 515 kilowatt hours. The noncontiguous Pacific states (Alaska and Hawaii) had the lowest average monthly consumption.

Maine was state with the second lowest level of average monthly consumption. Relatively mild summers and reliance on heating oil during the winter largely explain the low levels of consumption in Maine. According to the EIA over 80% of the homes in the Northeast rely on heating oil for space heating instead of electricity. In 2013, the state with the highest average price per-unit was Hawaii at 36.98 cents per kilowatt hour. The state with the lowest average price per-unit was Washington at 8.70 cents per kilowatt hour. Of the four types of electric industry consumers tracked by the EIA, residential consumers account for the largest share of electric industry sales at 37.4%. Commercial consumers are a close second at 36.1%. Industrial consumers account for 26.3% of sales. In addition to being the largest consumer of electricity, residential consumers generally pay the highest prices. The average retail price paid by U.S. residential consumers in 2013 was 12.13 cents/kWh.

The average retail price paid by commercial consumers was 10.31 cents/kWh while industrial consumers paid 6.88 cents/kWh. The electric bill is a large share of a homeowner’s expenditure on housing and the most expensive utility. Although climate plays a significant role in consumption, and production a significant role in pricing, the age of the housing stock also plays a role. Newer homes tend to be more energy efficient than older homes. NAHB analysis of the EIA Residential Energy Consumption Survey (RECS) found that on a square footage basis newer homes use less energy and housing built in previous 10 years accounts for only 3.2% of energy consumption. Of course, one method for reducing electric costs is the installation of residential solar systems. Besides offering tax benefits, such installations add value to a home and reduce utility expenses. ‹ Eye on the Economy: A Focus on EmploymentU.S. Household Balance Sheet Improves Again › Natural Monopolies and Pricing Policy

Assume that a certain natural monopolist has the following demand and cost related curves: Why is this a natural monopoly? The answer stems from the monopolist's natural (cost-related) barriers to entry. The relative position of the AC and MC curves give the natural monopolist a cost advantage over its competition. Taking a closer look at these equations, you'll see that AC is always going to be greater than MC. Remembering the relationship between marginal and average values, AC will be declining as long as MC is below it. In general then, for a natural monopoly, AC is said to decrease (as Q increases) through "some relevant range of market output". On a graph, it looks like this: We'll calculate the values for P* and Q* below, and also explain the meaning of the shaded areas. If allowed to decide herself, how much will this natural monopolist produce, and at what price? If allowed to set her own output and price, this natural monopolist will produce where MR = MC:

Set MR = MC, and solve for Q*100 - 2Q = 15Q* = 42.5 Find price by plugging Q* into the demand equation: P = 100 - (42.5) = 57.5 Therefore: Q* = 42.5 and P* = $57.50 Suppose we also want to find the monopolist'sTo do that, we use the formula (P - AC)Q. Before plugging things into this equation though, we must find AC. The value for AC is found by plugging Q* into the AC equation to get AC = $24.41 (i.e. AC = 15 + 400/42.5). To make these kind of profits (the area represented on the graph by the striped rectangle), the monopolist sets a price exceeding what might occur within a more competitive market. This high price makes consumer surplus (shaded yellow in the graph) rather small. One big problem with this result is that since the natural monopolist produces less output than what is possible under perfect competition, there is some deadweight loss (shaded blue on the graph) -- which represents the value of output not produced as a result of P > MC.

To get rid of the DWL, a government regulator might step in and force the monopolist to set its price at marginal cost. 1. Marginal Cost pricing: When the regulating agency forces this firm to set its price at marginal cost, we have what is called marginal cost pricing. In this case, that means setting P = $15. How much will the firm produce when P = MC? Set Demand, or P, equal to MC and solve for Q*100 - Q = 15Q* = 85 What are the firm's profits when P = MC? which represents a loss. On the graph below, these values and the areas for consumer surplus and profits are illustrated. Notice that the area of consumer surplus overlaps that corresponding with profit (loss), and that there is no deadweight loss since Since the firm is making a loss, it needs to consider the future. That is, should the monopolist stay in this industry if, over the long run, the best it can ever do each year is make some type of loss? The answer would obviously be no, and so if the price were set at $15, the firm would eventually exit the industry.

The whole point of government involvement here relates to the fact that regulators wanted to make things more efficient (in terms of allocative efficiency). However, achieving this particular type of efficiency causes the firm to eventually exit the industry -- leavingTherefore, to prevent the firm from leaving, our regulator must also allow the monopolist to cover her losses. One way to do this is by subsidizing the monopolist the amount of her loss ($400.35). Another way is to give up on the idea of producing where P = MC. 2. Average Cost pricing: One possibility is that the government regulator might want to allow the firm to charge a slightly higher price, but make zero economic profit. This is accomplished when P = AC, an approach that is called Average Cost pricing. Figuring out (algebraically) what the price will be is a bit more involved than what we did above. To algebraically find the price that would equal average cost, we first set Demand (Price) equal to Average Cost (AC), then solve for Q* and lastly plug Q* into the Demand equation to get P*:

Set P = AC: 100 - Q = (400/Q) + 15 Rearrange this equation to get: Q2 - 85Q + 400 = 0 Using the quadratic formula, we can solve for Q: Plugging Q* into the Demand equation, we can solve P* = 100 - (80) = $20 Consequently, setting P = AC means setting P* = $20, and getting 80 units of output. In the graph below, these values are given, as are the corresponding shaded areas for consumer surplus and deadweight loss (remember that profits are zero here since P = AC, but there will be some deadweight loss since P > MC). Of course, the problem here is that while the natural monopolist is able to make zero profits, thereby ensuring that the firm will stay in business, some deadweight loss reoccurs -- the very thing that government involvement was trying to eliminate. Another potential problem with government imposing this type of (average cost) pricing is that it may create an incentive for the firm to inflate its fixed costs.

This is called overcapitalization, because the firm may overinvest in capital equipment since it is, in a sense, guaranteed a "normal return". What we find is that, when charging a single price to all consumers, a natural monopolist's costs force us to choose between allocative efficiency and allowing the firm a fair return on its investment (without subsidizingA final approach involves using two different "prices", what we'll call here a two part tariff. Suppose the regulator forces our monopolist to sell every unit of output at $15 (i.e. P = MC), but also allows her to charge a fixed (flat) fee that all consumers must pay before buying this product at $15. In other words, the natural monopoly is allowed to charge something we could call an admittance fee. This fee establishes who is in the market. Those consumers who pay the fee are subsequently allowed to buy as much product as they want at $15 per unit (the MC price). Before this extra fee, a price of $15 caused the monopolist