In this self serving blog post, I want to point you to my demand side papers that explain why California home prices are so high and my supply side papers.
Demand Side:
Kahn Matthew E., 1995. "A Revealed Preference Approach to Ranking City Quality of Life," Journal of Urban Economics, Elsevier, vol. 38(2), pages 221-235, September.
Cragg, Michael & Kahn, Matthew, 1997. "New Estimates of Climate Demand: Evidence from Location Choice," Journal of Urban Economics, Elsevier, vol. 42(2), pages 261-284, September.
Cragg, Michael I. & Kahn, Matthew E., 1999. "Climate consumption and climate pricing from 1940 to 1990," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 519-539, July.
Matthew E. Kahn, 2000. "Smog Reduction's Impact on California County Growth," Journal of Regional Science, Wiley Blackwell, vol. 40(3), pages 565-582.
Dora L. Costa & Matthew E. Kahn, 2000. "Power Couples: Changes in the Locational Choice of the College Educated, 1940–1990," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1287-1315.
Dora L. Costa & Matthew E. Kahn, 2003. "The Rising Price of Nonmarket Goods," American Economic Review, American Economic Association, vol. 93(2), pages 227-232, May.
Kahn, Matthew E. & Walsh, Randall, 2015. "Cities and the Environment," Handbook of Regional and Urban Economics, Elsevier.
- Matthew E. Kahn & Randall Walsh, 2014. "Cities and the Environment," NBER Working Papers 20503, National Bureau of Economic Research, Inc.
Supply Side:
Kahn, Matthew E. & Vaughn, Ryan & Zasloff, Jonathan, 2010. "The housing market effects of discrete land use regulations: Evidence from the California coastal boundary zone," Journal of Housing Economics, Elsevier, vol. 19(4), pages 269-279, December.
Kahn, Matthew E., 2011. "Do liberal cities limit new housing development? Evidence from California," Journal of Urban Economics, Elsevier, vol. 69(2), pages 223-228, March.
So, we know that the Demand to live in California is high and we know that due to mountains and zoning regulation that housing supply is limited. There hasn't been a good structural economics paper disentangling these two effects. We also don't know whether zoning (by making an area more beautiful and orderly) actually increases the demand to live there. The original Glaeser and Gyourko housing supply work assumes that shifts in supply (due to zoning) do NOT shift out the demand curve. But, is this true? Intuitively, would Paris still be Paris if the architecture was not regulated to conform by certain standards of beauty and aesthetics? This is a tough counter-factual because we see lots of rich tourists visiting Paris but would Paris be a very different bundle of attributes if developers could build "anything any time in any place" that they seek to build?
IO economists haven't grappled with this issue because they don't explicitly incorporate government regulations as constraints on the attributes bundled into differentiated products. Only the CAFE fuel economy constraints and their implications for car markets have been partially explored.