Definitely could, but they'd need to lay their own international cables -- PIPE Networks (owned by TPG) is the closest we've got to a market disruptor and they can only compete because they have their own undersea cables.
Given the low total population and very low population density it's probably not really worth it though.
As a general comment, I hear this 'low population density' about Australia a bunch. I wonder if its a fallacious argument for many business cases.
Contrary to the Crocodile Dundee image, Australia is one of the most urbanised nations in the world. We have almost 50% of the population in Sydney & Melbourne alone, and our top 10 cities takes this to almost 90%. While a big landmass you can reach a high proportion in relatively few spots. Assuming a business doesn't expect infrastructure/coverage for the entire population Australia not to bad density.
Obviously the general remoteness of Australia and 25m population remain big factors, and I suspect this is more relevant than the often cited density issue.
Local bandwidth in Australia is generally more expensive than Europe or USA because we have a huge area to cover and a relatively low population. Also because of this the infrastructure that does exist is held by a handful of companies who can pretty much dictate the price.
International bandwidth is hugely expensive in Australia, everything goes by expensive undersea cables. While both the US and Europe have bordering countries where most of traffic is likely to go. Also similarly with local infrastructure, it's all owned by just a handful of companies who can strong arm providers.
Also in reference to your original question, it sounds like the VPS provider your using doesn't separate local vs. international traffic, so they're probably assuming most of it will be international and are charging on the higher end of the scale.
I think BinaryLane charges a bit less at around $1 per 10GB. There's probably cheaper providers out there but YMMV.
> International bandwidth is hugely expensive in Australia, everything goes by expensive undersea cables
I have heard this quite a bit, but why is it hugely expensive for this reason? Is it because of the maintenance of the undersea cables or recouping initial construction costs?
I think the prizes are actually pretty good considering the zero cost of entry. A local startup weekend I participated in had prizes that were far less than what was on offer for Rails Rumble 2012.
Given the low total population and very low population density it's probably not really worth it though.