Urban Agglomeration and Dispersion: A Synthesis of Alonso and Krugman

Urban agglomeration becomes increasingly important because of the globalization of world economies. This paper is a general equilibrium analysis of urban agglomeration economies due to product variety, and agglomeration diseconomies due to intra-city congestion in a two-city system framework. Special attention is paid to the impacts of transportation cost decrease on urban concentration and dispersion. Our main result is that dispersion necessarily takes place when the transportation cost is sufficiently low. We also conduct numerical calculations using specific parameter values, and depict a structural transition from dispersion to agglomeration, and then re-dispersion when the transportation costs decrease monotonically over time. Finally, we observe that dispersion is usually bad as compared to agglomeration, from a welfare point of view.