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"If people generally replace their big cars with smaller cars, you'll have more parking in the city, right?"
And if there is more parking in the city, the 'tards will quickly buy bigger cars to take advantage of it!
Good point about overall urban efficiency however. There just needs to be some mechanism to rewards folks who drive such small cars. How about 1/2 parking spaces? Fit your Smart-sized vehicle into a half-space, pay half the parking fee (or fine, if you forget to feed the meter). Use a full-size car? Pay double!
Seriously, I wonder what a well-sprung and manual transmission Smart might be like. I remember when the VW Rabbit debuted. It was a small car, but pretty hot and it got 40MPG. I remember one of my schoolmates doing front wheel drive burning rubber donuts in the school parking lot with one of those. Very impressive.