"It is not actually illegal to build tiny cars for the U.S. auto market. The problem is that kei cars built for foreign countries don't meet U.S. safety standards, so you can't import them unless you're willing to buy an antique. And companies could build tiny cars to U.S. standards, but given the American preference for big vehicles, they simply don't."
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Apparently big cars are favored by CAFE regulations, so maybe consumer preference is not the main factor.
Also nowadays, people cannot afford a "fun" car and a practical car. The family budget can only afford 1, so that car needs to be as big and versatile as possible - a "do everything" vehicle. An F-350 can haul the family of 5, pick up a half-ton of mulch, and tow a trailer, etc.
If all you have is a Prius, its great if you just need to get to work, but it is not very practical if you kill a hog or deer and need to get it home (I know, back in the day you tied it to the hood, but the hood on new cars is too sloped and small!), or need to haul anything at all - including lumber, and other bulky items.
People who can afford 3 cars in the garage can afford to get a small car...people that can only afford 1 or 2 cars have big, versatile ones.