Introduction: Reduction of gap between rural and urban areas has been one of the most important problems in sustainable development in order to prevent the migration from rural area to big cities and urban areas. Optimum allocation of subsidy is not only one of the suitable ways for reducing the gap, but also inequality in the levels of living between rural and urban households. So, the question is that, How much of indirect subsidies for electricity has been allocated to the rural and urban households in Hammadan State? How the change in electricity price will affect on the welfare change?

  Method: In this paper the demand for electricity is estimated by ARDL method for a period of 1382-1387 on two months basis for issuing the electricity bill. Then household's welfare variation is calculated from electricity price change.

  Findings: Estimation shows that the price and income elasticity for rural and urban household are different. Due to difference of price and income elasticity, the rural and urban households are receiving different indirect electricity subsidies.

  Conclusion: The results have shown that due to 20% increase in the electricity price, the urban households will pay three times more than rural household for the consumption of electricity. Therefore if government distribute the incomes resulting from gradual increase in the price of electricity equally between all household, the nominal income of rural household will increase by .07%, but urban households' reduces by .04%.