This is a complicated question, but I will try to explain it in simple words through a story.
About 1000 people are living on a huge island and nearly everyone owns a computer. Most of the people are living in small groups called villages at various parts of the island. Each village is about 10KM away from the another and each of the villages has about 200 people each.
Most of the people are hard working good people doing their jobs as farmers or postman or teacher. Some of them are small business men, traders and boat owners.
The concept of Internet doesn't exist in our fictional island. They use their computers to calculate stuff, watch videos, save digital photos and play games. Data transfer between devices happen either through pen-drives or Bluetooth. Movies and videos are only sold in CDs.
Things were going well and everyone was leading a calm peaceful slow life. One day, a young guy named Jakob had a brilliant idea- what if he could connect all the computers in his village with wires? Then everyone can send videos and games to each other without the need of CDs or pendrives.
So, he did some research and found that in far off places they connect the computers using wires and he could also do it. There are over 150 computers in his village, so it is going to be expensive to buy wires for his project. Also he would need routers and switches to connect so many computers together.
Jakob didn't have that much money, so he explained his idea to Paul -the richest guy in the village. Paul thought this could be a viable business. He gave Jakob the money to buy the required things on the promise that he will own 50% of the business and that they will charge the people a fixed monthly payment for using this service.
Jakob was a creator and he didn't care about the money. He was super happy that his dream of connecting the computers together is becoming true. But since monthly payment is required, now he will have to ask everyone if they need this service. Some people really liked the idea and signed up while some others didn't, as they were reluctant to spend money for this.
Jakob left the island, went to the mainland, purchased the required components and came back home. Since only about 80 people signed up, the overall cost of the components were high as he couldn't qualify for the wholesale price. This inturn increased every subscribed person's cost slightly.
The next day he realized that, this was going to be a bigger project than he expected. It is tremendous work to properly connect 80 houses with wires in a standard fashion. So, he decided to hire two guys to help him with this job.
To lay wires to one of his subscriber's house he had to put wires through a land which was owned by a non subscriber. This non subscriber was not okay with laying wires through his land. He demanded money for using his land for this purpose. Ultimately, Jakob had to pay some money to this guy for using his land. This further increased every subscriber's cost slightly.
After weeks of hard work, they finally finished this project. Despite of cost over-run and unexpected issues, Jakob was happy that his dream have come true. He named it the Local Area Network. Paul was unhappy with the cost over-run. At the current rate it would now take 5 whole years for just getting his investment back.
All the subscribers were happy with this new technology. Many people stopped using CDs and pendrives to transfer data altogether. Soon, even the non subscribers started signing up for this useful service. Paul saw a wonderful opportunity in this. Since, there is now a demand for the service and he is a monopoly, he could increase the price to whatever the villagers can afford to pay.
Despite of the increased monthly fee, now Jakob has 120 subscribers and most of them are happy. Paul was also happy as they were now getting more money. But, Jakob now faces a new problem. There are now more users than his system can support. Some users are over using the network causing traffic blocks and due to this, other users are not being able to use the network at all.
Recently a guy transferred 1 TB of his movies to another guy and this took up the entire network's bandwidth for hours. Many people are now unhappy that they are unable to use the network due to frequent over use from some users.
Jakob had to find a way to solve this issue. After consulting with Paul, they decided to have a 'Fair Usage Policy(FUP)' which means, each user is only allowed to use X amount of data. They now have multiple tiered price plans which users can subscribe to, depending on how much data they use each month. Additional data costs extra money. This almost eliminated any network misuse and brought in more revenue.
Although Jakob's cost was not based on the amount of GBs users consume, villagers started talking about how much it costs per GB as their costs were based on the amount of data they consume.
Few months passed. The village was hit by a cyclone which damaged many of Jakobs wires. It cost him lot of money and time to fix the damages. He now have one more employee for maintenance as there were frequent issues which needed repairs. For example :- someone cutting the wires accidentally, a tree's branch falling on the wires, modem getting caught on fire etc.
He had to employ one more employee for collecting the money from each subscriber, accounting the total costs, filing the village tax etc. Jakob is now running a full business. The tale of his Local Area Network spread to the other villages on the island too.
An year passed. At some point in the past one year, each village started their own local area networks after taking inspiration from Jakob's successful network. Each network was managed by a different person.
At one village, a guy was able to tremendously reduce cost by using the existing landline phone's wires for both phone and internet.
All the network owners of each village decided to meet one day and discuss each others problems and solutions. At the end of the meeting, Jakob suggested that it would be awesome if we can connect each of these villages together with wires too. Then villagers will be able to share their stuff with the guys in other villages. This will be revolutionary. Currently, the only way of communication between the villages was either through phones or through mail.
Everyone agreed, but the cost of laying higher bandwidth cables through such distances was too high. Apart from that, the switches, routers and other infrastructure required to handle such high bandwidths were damn expensive. Every network owner tried to contact rich people for help, but this was too big for any individual to handle. So, this idea was dropped.
Many months later, a group of rich people decided to form a company named Wide Area Network(WAN) which will lay cables in between two of the richest villages. Jakob's village was one of them. The deal was that, Jakob and the other network owner will pay monthly fixed amount plus the data usage cost. It was expensive, but each owner saw potential in this project and they increased the monthly cost of each user to compensate this expense.
After some months, this project was completed and it was a huge success. Soon, all villages got connected to each other through WAN.
Some young computer geeks found opportunity in this. They decided to build websites which can be used from browsers. Earlier, the network was only used to transfer files between computers, but now people could read text and watch photos on their web-browsers, without going through the pain of downloading and uploading files. This was a revolutionary idea.
Soon the village news started appearing on websites. Some guy thought we can have a virtual post office on internet and email was born. Some one else thought email was okay for slow communication but it was not as good as gossiping in real life, so he decided to build a chatting software called messenger through which villagers could send messages to each other instantly.
Soon, some big cooperation decided to connect the island to the mainland through a submarine fiber optic cable. This was a mega project involving many companies. But since there were 1000s of users, only a slight amount of this project's cost got trickled down to each user's monthly payment. Now villagers can video chat with their friends in foreign countries. And, this entire network was named the Internet.
Someone made a free blogging software called WordPress, so people started writing blog posts & articles about the things they know about, in their own websites. Someone made an entire encyclopedia called Wikipedia which was written entirely by random users using the internet.
Things started to grow exponentially from there. Some people made sites which were forums for specific topics. Now, there were so much information on thousands of websites that it was tough to find the information you are looking for. Some people build websites which categorizes other websites on the basis of information they contain, just like the old telephone directory.
But, the number of websites grew so much that it became nearly impossible to have a directory of all websites. To solve this problem, couple of smart guys build a website called Backrub which was a search engine that had a robot which automatically browse all the websites in the internet and indexes the contents of each website. After some months, Backrub was renamed as Google and since it was the easiest way to find useful websites, it became the face of the internet.
Some one thought he could sell goods through websites just like how we do in real world markets. Amazon and Ebay was born. It was tough to send money through internet, so someone thought it was a good idea to send money using just email ids, so PayPal was born. Someone made Reddit, because he though there should be a website where users could submit useful content and discuss about it.
Some people started building virtual social networks where people could interact with each other through the computer just like how we used to do in parties. Myspace, Orkut and Facebook was born. Someone thought there was no good easy way to share videos online, so he made a site exclusively for videos and named it YouTube. Someone thought blog posts are too big to read, so he build a micro-blogging site called Twitter. Some other guy thought all this was not enough and made a separate question answer site named Quora.
There are now some people who met each other on their computers and ended up getting married to each other. This network have now became an important part of the community. Many people now spend lots of time infront of their computers. Internet became so useful that it became a vital part of our life. Since it is so useful, people are ready to pay anything to use it.
It's crazy how fast it grew, isn't it?
The End. The story is over. Now tell me, what is the cost of the Internet? How much extra are the users paying?
It is complicated to calculate the cost of the Internet as money is exchanging many hands at various stages while all it does is connect one computer to the another through some wires.
The cost is nearly the same as the global Internet service provider's cost of operation. Since there is no easy way to obtain the cost of operation, I would consider the revenue instead. A market research reports claims the total revenue of Internet service providers Industry to be 536 Billion dollars per year with a growth rate of 10% per year. It accounts for 211,168 companies which has a total of 2,184,000 employees. (
Source)
There are 3.3 Billion internet users as of now, but many of them are not regular users. For the sake of calculation, let us consider 2 Billion users. So, average cost of internet is about $268 per year or $22.3 per month.(This includes ISP's profit too)
If you live in a densely populated area where most people want internet, then the cost gets divided among lot of users, hence the average cost per user will be less and the ISP will be able to provide cheaper plans. But, if you live in a sparsely populated area, then the cost will be higher.
If you live near an international under water cable landing station(port cities like Mumbai/New-York), then the ISP's cost will be lower but if you live far away from the cable landing station(like Delhi/Nebraska) then the ISP's cost will be higher, as money is exchanging more hands to connect to one of the international landing stations. (A cable landing station is a place where the international underwater wires meet the land. Most of the internet traffic goes through these wires.)
But, according to me, the cost of internet is based on "what the market will bear" rather than what it costs the ISP to provide internet to you.