a commodity that reflects two underlying price premiums. The first is an amenity premium – the price people pay to be around great restaurants, museums, theatre and culture as Harvard’s Ed Glaeser and others have shown. The second is a productivity premium, for the economic leverage that comes with such central locations. As the University of Chicago economist Robert Lucas famously put it: “What can people be paying Manhattan or downtown Chicago rents for, if not for being near other people?” It’s this underlying productivity effect that generates higher incomes, which in turn lead to higher prices.I think this is right, but I would just add that while economists tend to treat amenity values as largely exogenous, i.e. inherent to a location, they are in fact partly endogenous to the market. When prices are Manhattan-high, would-be buyers or renters know that their neighbours will be rich people. And some rich people are willing to pay a lot to be surrounded by other rich people. It's partly status and partly sociocultural affinity - snobbery, you might say.
So there is a social component to amenity as well as an environmental one, and the social component is partly endogenous. I think this is one reason why you get runaway price differentials between areas of the Manhattan variety.