I have 64GB model myself but I can understand the justification for 16GB.For me it's quite simple: my 64 GB iPhone 5s has 38 GB of uncompressed audio, 7 GB of photos, 4 GB of apps, 4 GB of docs and data, and 1.25 GB of other stuff. That leaves me with a paltry 1.5 GB free, and I've already deleted a few apps and many albums I'd like to keep on my phone but can't for lack of space.
First of all, 16GB is cheaper so that one reason why it's so popular. But another is increased use of cloud for storing photos and videos you take and streaming music and video.
By the same token, not everyone wants to stream. Data cost is one thing. Having a reliable high speed coverage is another.
Anyway, I strongly suspect that iPhones will move to iPad style capacity-storage structure sooner than later (32GB, 128GB, 256GB).