In The Logic of Life, Tim Harford tries to figure out why rents in New York and other trendy urban locations are so high. You might think that the rents are high because the wages are high. But adjusting for the cost of living, urban living remains a bad deal. Harford cites Glaeser's finding that "[E]ach doubling of city size raises wages by 10 percent but raises prices by 16 percent." So what gives?
Harford considers, then rejects, the idea that people are primarily paying a premium for urban consumption amenities. He estimates that it costs an extra $150 a day to live in Greenwich Village instead of Rock Island, IL, then tells us:
Just how often to people plan on going to the opera anyway? Sure, Manhattan's restaurant scene is better than Rock Island's, but if Manhattan's residents are really paying for access to restaurants then they are paying $150 to their landlord for every evening his nicely located place puts them close to a decent restaurant. You'd need to eat out an awful lot to make these figures seem halfway plausible.
Actually, I think these numbers are easily halfway plausible. If you lived in Rock Island, what would you even spend your extra $150/day on? (Here's the city's website). To overstate the point, many of us don't want to eat McDonald's in a mansion.
But more importantly, Tim misses the most important amenity of all: people. If you're a trendy, successful person, the inhabitants of Anytown, USA are boring. The typical Manhattanite wouldn't want to buy a mansion in a small town in Kansas because he would be bored out of his mind. Opera and restaurants might not be worth $150/day. But if you've got a decent income, $150/day is a small price to pay to not to fall asleep in your soup.
You might reply: "You're forgetting that the typical resident of Rock Island wouldn't want to move to Manhattan because he would be annoyed by their effete, snobby ways." There's some truth in this. But on net, the Manhattan premium still makes sense. A sizable minority in places like Rock Island dreams of living someplace like Manhattan, but almost no Manhattanite dreams of living in Rock Island. So without much higher rents, there would be a net influx into Manhattan.
In high school, many of us would sell our souls to hang out with the cool kids. Manhattan offers the same privilege to anyone willing to pay $150/day. For millions of people, that's a bargain.
P.S. I much prefer Fairfax, Virginia to Manhattan. That's partly because Manhattan gives me claustrophobia. But it's mostly because I want to hang with the coolest kids of all.