Externalities, indivisibility, nonreplicability, and agglomeration

In this paper we argue that the impact of external scale economics and diseconomics on city size is not nearly as clear-cut as it is tacitly believed in urban economics. Similarly, city-size distortions are not caused by externalities alone. Indivisibility and nonreplicability, which prevent establishing the "right" number of cities, may represent a source for city-size distortions which can be stronger than the standard resource misallocation resulting from external scale economies and diseconomics. It follows that a direct population dispersion policy is not just an inferior substitute to Pigouvian taxes and subsidies but rather a useful complement. (C) 2000 Academic Press.