The British Psychological Society Digest has posted a paper inexplicably investigating the onset of sarcasm in child development. Kids get sarcasm at least by 10, but not yet by 5. [Added later: no word on whether British children develop sarcasm earlier than normal children.]
Why? For sarcasm you need a theory of mind. For me to appreciate (and enjoy) the incongruity of your saying something that you don't believe, I have to understand that a) you're not saying it to deceive me (that is, your intent) and b) you don't believe it (that is, I have to use what I know about you to form a model of your true beliefs, independent of the statement that you're making right now).
Blattman's post ends with the inevitable crack on the supposed lack of sarcasm of earnest Midwesterners, though in my experience I find this to be more true of Southern Californians. In my own anecdotal experience, Midwesterners understand
sarcasm just fine, they're just clear communicators averse to saying the opposite of the truth, and furthermore they're not so self-centered as to expect you to internalize a model of their belief states in order to get their brilliant jokes.
But while we defend geographic sarcasm stereotypes - since sarcasm relies on theory of mind, i.e. on the ability to quickly form and evaluate models of other human beings (who you may have just met within the hour), is there a link between sarcasm ability and number and breadth of humans you're exposed to? In other words, in a dense cosmopolitan area, are people more likely to be sarcastic? Certainly New York is the sarcasm capital of the United States. Meanwhile, Southern California is not dense, and diverse though it may be, people here have an unfortunate tendency to hunker down in ethnic colonies, both of which conspire to keep them from "practicing" modeling a wide range of other humans.
So are London and Paris notoriously more sarcastic than the rest of their respective countries? What about Hong Kong relative to rural China? Another possible explanation is that people in cities tend to be more educated. You could control for this by finding a dense city with low education levels and compare against more educated people in the suburbs; this model predicts the people in the city would still be more sarcastic.