The reason you pay what you do, the reason you don’t get all the clicks and the reason why you now pay $3.25 not $2.95 per click is because of the competition.
What you can do to fix it:
Want to know the strangest thing? It’s the people below you are the ones driving your CPC higher and higher, not the guys above. How does that work? Well, considering all things were equal, in the Adwords bidding war, you only pay 1c more than the guy below.