Maybe it's a poorly designed air gap, or maybe your wider hose does not descend straight down to the downward (cut it shorter, if necessary). Functionally, you can eliminate it, making a high loop with the drain hose under the cabinet. Then use the extra hole for a soap dispenser, or just install a cap on it.

Is the air gap installed in the correct direction?

The inlet and outlet are NOT interchangeable.

skinny = from dishwasher
wide = toward disposer

BTW, the rubber end (wide and grey) of the dishwasher drain hose will also fit onto the skinny inlet. Snip off the wider part (only) and the skinnier part if it will fit onto the inlet. Tighten with a hose clamp.

"skinny = from dishwasher
wide = toward disposer"

More important is the DW feed the more outer of the two connections, while the GD gets the centered line from the gap.

The most common type uses a 180 degree bend in the INLET to the gap.

The water is then forced down and into the centered line in the gap and to the GD.

Hook it up backwards and the water shoots up and out instead of into the drain line from the gap.

The other thing that can cause problems is failing to remove the knockout in the GD for the line.

Thanks all. After reading the comments, it looks like I have connected the air gap backwards. I will reverse the connections and cross my fingers.

Help
Looking at the air gap soap/lotion dispenser combos online, I do not see the heights listed. I saw a video of one which was nearly as tall as the faucet! Anyone know where to find measurements: Danco, and other brands?

Also, some are only caps and some come with all the workings. Any problems putting an air gap/soap dispenser cap on plumbing setup for a regular air gap?
Any issues to use it for lotion as I want to use it for lotion instead of soap dispenser.

Here is a link that might be useful: air gap assortment

There is an interesting discussion here on airgap and how someone claims water softener drain water is perfectly good to drink.
http://www.terrylove.com/forums/showthread.php?47080-air-gap-built-into-Fleck-7000-drain&p=345079

for andre,
depending on what state you live in you can not remove the AIR Gap, in California it is 100% required by code and they don't care what brand DW you have - even if it is a Miele with a backflow preventer. They do not allow a "high loop" technique which is using a clamp to attach the DW drain hose high up in your cabinet underside to create a pseudo air gap. This is because they want the air gap "above" the flood level of your sink. A high loop can not achieve this.
typically, the cause of water from an air gap is as mentioned (a) not punching out the plastic cap in a new garbage disposer or (b) the drain hoses were installed backwards DW goes to the smaller end of the air gap and the hose to GD goes to the fatter 7/8" end of the Air gap. I also would not use those free water spring clamps that came with the DW. I'd get those SS screw down type clamps - easier to get off and on.
-------------------------------

For Dreammarrow,

Problem with the new style Air Gaps that say they are also soap dispensers are they are HUGE. I just bought one from Overstock and I will not be using it. I will stick with my smaller profile air Gap. They don't even hold much soap. They don't come with a plastic container that sits under your sink like a normal soap dispenser. Basically it is huge because the inner tube serves as the air gap and the outer part is the soap holder.

Hopefully, someone will come out with a better combo Air Gap -soap dispenser but for now they are ugly and huge and do not come with a plastic bottle for under the sink. Since it acts as an air gap too, they need to leave the space directly underneath for the hoses from the DW and the GD to connect to. Make Sense? Therefore, the above sink part is fat and tall to hold the soap and not very much soap at that.