If I got a dime for every time someone believed markets work in practice like they do in theory I'd be rich, except for the fact that someone else would be willing to do the same job for a nickel.

The permitting fees and time to open a restaurant in SF are astronomical. There is also a finite amount of space in SF, so the owner can collude or otherwise engage in price fixing using his existing market position. also, the owner can drop prices and sell at a loss or near loss and force you out of the market if you somehow manage to get the permits.

This is literally what's happening as that's what it costs at El Farolito next door. People are willingly forking over twice as much for this burrito because they want to or don't know any better.

That's the irony, "if their costs go down", never happens.