Under the Ultimate Campaign rules for creating and running a Kingdom...
First off, I just want to point out that the rules from Kingmaker (as originally printed in 2010), differ significantly from the rules in Ultimate Campaign (as printed in 2013).
The Kingmaker version of the rules was filled with holes, it felt like no one had actually tried to use them. If you look at the math on that version, there was basically no reason to ever claim / populate a forest hex. Also, the only buildings worth building were magic item factories as they were worth dramatically more than everything else. What's worse, after creating these elaborate rules for Kingdom building, they then create rival kingdoms that don't follow any of these rules !?!
So at the least, make sure you're using the new rules for building.
So are we missing something or is the system flawed?
We found the Kingmaker version so terrible that we basically wrote our own loosely based on the one presented.
The Ultimate Campaign rules worked out some of these issues and are much more sensible, but there are still issues exactly like the one you point out. I would say that the system as printed is still quite flawed.
It really feels like the Paizo team just printed "some good idea" without ever really play-testing that idea. Clearly, even a basic play-test run would have discovered the missing incentive for building anything but a metropolis.
Frankly, if you don't have to go much deeper to find all kinds of other flaws. Some simple ones:
- Army representation. In our Kingmaker campaign, I managed to convert all of the Stag Lord's soldiers to my cause. That's 50 armed men with horses. Over the course of the time we threw funds into some more militia to water down the ruffians, but there was no real way to represent this military presence within the kingdom. In fact, as a player Kingmaker seemed to be filled with events that really didn't care at all about our military investments.
- Resource trading, there seems to be no difference between the silver and the gold mine. We "negotiated" with the Dwarves mining our gold, but the outcome of the negotiations meant nothing for the kingdom as a whole.
- Trade negotiations with other kingdoms. This doesn't seem to happen and there are no rules to increase/decrease the value of certain resources. There are lots of feats / abilities / spells that would seems relevant to large-scale trading but none of the feature in the game.
- There's no system for "information gathering". How does spying work? What information do I know about my surrounding kingdoms.
BTW, the military problem gets worse if you have PCs with the Leadership ability. Our "King" was a Cleric of Abadar who receives Leadership for free at 8th level. If you look at the Leadership bonuses, it's possible to have a score of 13 to 15 which grants you 2nd and 3rd level followers. Arguably those followers are Clerics or Adepts which would clearly have an economic & military impact on the Kingdom, but there is really no rules for managing these simply. Do they form an army unit? Do they take BP to support? Can I instead leverage them for something else?
I mean, if I have a 3rd level wizard "on staff" and he's not an adventurer type, he's probably going to spend his days crafting magic items. Magic items "at cost" is a big deal.
At the end of the day, you will be making a lot of judgment calls for things that are simply not in the rules.