Well, another small ISP here. Couple of things. First off, customers are NOT paying for what's called a CIR. So, of course the service is "oversold". Every service provider industry is "oversold". Landlines, Cell Phones, Car Mechanics, TV Repairmen, Satellite TV, even Tech Support. You think there's one guy in India sitting there waiting for you to call about your Dell? No, of course not. By definition, service providers HAVE to oversell to survive.
Secondly, it's really not about just one person doing something like this as a small ISP. Yes, one person doing such can have a seriously negative impact on the rest of the users, but it's when you get multiple people doing it that really compounds the problem. One torrent user generally isn't too much of a problem. Get two or three with high connection limits, and up/down set to unlimited, and you have a serious problem on your hands.
Finally, equipment is expensive, commercial connections are expensive. If you don't believe me, go price out some comparable commercial internet connections from Cogent, Level3, any of the baby bells (Verizon, Qwest, AT&T/Cingular, etc), and you'll see that you'll easily be paying 10x more than what a cable/FiOS user is going to pay for a residential connection. There's a reason, and it's up in the first point.