As someone who lives in a Tiny House, its cute until its not. Your life grows, but your place doesn't. Its like being planted in too small a pot. By the time you move on, market rates for larger places to live have gone up a lot.

Its a bad solution all around.

It needs to be attractive to many people (not just yourself) so that it's financially sane to develop such a building. That's really the key.

It's really tricky... But really, what's the alternative? Build larger homes people can't afford? That causes gentrification even faster, pushing people outside the city who can't afford it. In Amsterdam for example the waiting list for social housing is something like 10-15 years... so either you live way outside the city centre, have special connections, make a lot of money to pay the market rate or you leave the city. Building smaller homes would probably reduce the waiting list to something more sensible, the alternative is for people to leave the city and commute in... I'd guess that having the option to choose to live small bests not having it, but I'm definitely not completely sure on that, lots of counterexamples.

I do think regulations can and should say something about the number of people living in a unit, and enforce it. A small studio should be just that, a studio for one person or a couple. That's really hard to enforce of course, but if possible, prevent the issue of having 5 people living in a place designed for 1-2.