Let's take a closer look at the market for Internet access. Suppose most service providers offer full Internet access for $20.00 per month (flat rate). At this price, many users are unable to connect via their Internet service provider because so many others have demanded the service at the same price. Which of the two graphs below best illustrates this scenario?
If you chose graph B, you are correct. The ISPs are offering service at a price that is too low and the market does not clear. We have a situation in which the quantity demanded of Internet connections is lower than the quantity supplied by the Internet service provider.
Graph A indicates that the market has cleared; that there are the same number of people connecting to the Internet as the service provider can handle. Graph A does not appropriately depict a shortage of connections.
Take this short quiz to evaluate your understanding of supply and demand.
As you can see from the above activity, there is more than one way to move toward a market-clearing price. As in the case of America On-line and many other ISPs, an investment in technology helped move the supply curve outward resulting in a reduction of the shortage of connections.
Now that you have a better understanding of how the market for Internet service can clear, it's time to move on to a lesson on tax incidence. Click here to investigate proposed access charges.