The free market is not in-and-of-itself a goal to be pursued. Society has aims, and often, the clearest way to achieve them is through the free market with distortions strategically applied. This isn't SimCity, where it makes sense to zone your entire city center as industrial/commercial in order to grow the tax base: the city exists to serve the needs primarily of those who live there.
Otherwise, why not zone the entire city as a hotel?
I'm totally with you on the market needing "corrected" incentives in some cases to get us what we want/need as a society. A example to me are the broken ISP market because of physical constraints. Another different category of cases are issues were the prisoner's dilemma applies where we have negative externalities like pollution. I don't see how that's the case here.
I believe industrial needs to be its own, separated zone because of the pollution. Commercial and residential can be happily mixed though and if the market is telling us to build a giant apartment building somewhere because people want to live there and pay for it then why would you second guess that?
Turning an entire city into hotels would of course never happen because there is no demand for that. Why not allow building of hotels everywhere though?
The purpose of zoning is to segregate property bidders into classes by purpose, or willingness to pay. Otherwise, you have someone whose purpose with the property is to generate $100k/mo, bidding on the same property as someone whose purpose is simply to live with no intention to generate profit. It serves society to set aside a zone of property wherein people with residential purpose only can bid on the same property.
Likewise, it serves society to have bidders who are offering a long-term lease at a monthly price for an apartment to not have to compete against a stream of tourists who are spending out of their leisure budget. If a city needs new hotels, it can zone and permit the construction of them. The answer isn't to force renters to enter bidding wars against vacationers to discover the "true" price.
At least in the US, most housing zoning failures aren’t residential vs. other uses, they’re about protecting certain types of residential housing (generally detached single family houses) at the expense of other residential housing. Here’s more: https://www.nytimes.com/2018/08/21/upshot/home-ownership-nim...
I agree, in a single instance it sounds like the obvious thing to do. But it's not obvious that the cumulative effect of putting commercial and residential bidders against each other at a city scale will lead to desirable outcomes for society. In fact, what's obvious is that it won't.
> Otherwise, why not zone the entire city as a hotel?
Why not? All of midtown Manhattan, at least. If superwealthy and tourists will pay an exorbitant rates, might as well soak them for all the taxes they're worth and spend that money subsidizing transport and housing in the rest of the city for locals.
Tourists/visitors might are more valuable to the city than regular citizen. The amount of money you spend per day while traveling is way higher than your daily spending at home. Thus it makes sense to create as many hotel spaces as demand dictates.
It will be easy for single families to outbid a multi-million dollar corporation for these homes? What sort of buying power do you expect these families to have, relative to this enterprise?
The enterprise has more buying power but will also want to turn their investment into a profit. So whatever they do with that land ultimately needs to pay off. For it to pay off it needs to create enough extra value by being in that location.
Could it also be the case that investments driven by speculation and market manipulation would obscure the actual ROI (a lá Uber)?
Long-term the intuition is "this must be profitable at some point", so the market participants are acting irrational in the short-term. No one can compete with irrational actors, especially ones with an insane amount of capital to burn like we see today.
If you think the market is irrational, bet against it. Just claiming to know better but not putting your money where your mouth is and not having skin in the game is a anti pattern that's advisable in this case.
Otherwise, why not zone the entire city as a hotel?