Agglomeration

In the realm of the humanities four main classes of reasons for agglomeration have been identified [Carter (1977)]: surplus theories, the city as a wall, the city as a temple and the city as a market place. Deductive urban literature on the other hand recognizes two main classes of reasons for agglomeration: the city as a centre of production and the city as a public good. Surplus theories relate to the city as a centre of production while the wall and the temple are specific instances of a public good. But there is no deductive analogue to the city as a service centre; and the nature of such reasons for agglomeration is not intuitively clear, as for example, the persistence of periodic markets tends to suggest.This paper attempts to fill the obvious gap. Circumstances are specified under which agglomeration is better than dispersion in the following sense. The agglomerated state can support a higher aggregate profit and for every service of the urban economy, a lower price and a higher demand than those attained in the dispersed state. In the absence of output externalities such potential advantages may obtain under decreasing average costs for the economy. This is less demanding than the usual requirement of increasing returns for agglomeration: under the convex portion of decreasing average costs cities are compatible with the idea of general competitive equilibrium.