Promoting Starter Homes from the State Level?

In today's Boston Globe, there was an article on the affordability of housing in the Boston region which mentioned potential legislation that would require towns and cities to promote the construction of "starter homes".

Here is a blurb from the article.

"...propose legislation later this year that would either require or encourage municipalities to promote construction of "starter homes," which are in short supply in Boston's suburbs. The houses would be modest , on lots of 1,700 square feet or less, priced so families earning between about $80,000 and $130,000 could afford them."

Could it be that the true need for smaller housing is there but that the outrageous market of recent years has preculded the development of anything small. But 1,700 square-foot lots?? That must be a typo, right?

On May 21st, the Connecticut Post published an article stating that the State has proposed a bill that would provide up to $10 million to towns to support the development of affordable housing. This is the result of a study by Northeastern University's Barry Bluestone which stated that the cost of housing in Connecticut has led to a migration of 10% of the young working poplation.

Should State's really get involved in this market-driven housing issue? Could cottage development styles be one solution?
These developments have popped up in the pacific northwest as a way to provide "small" housing options for the empty-nesters and small families, and single people at a lesser price than a typical newly constructed single-family home would cost.