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Working Paper

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This chapter provides a survey of recent developments of positive as well as normative theories of city systems. Static theory of city system emphasizes the factors that result in the formation of cities through the interaction between two opposing forces: i) agglomeration economy; ii) agglomeration diseconomy. Furthermore, the theory examines the interaction between cities within the national economy through intercity trade and migration, which shape the internal population composition and industrial structure of cities within the system. New development of this theory has been influenced by industrial organization and economic growth together with the new urban economic paradigm. This chapter focuses on the following questions: What are the factors that lead to the formation of cities? When do cities specialize in production and when do they diversify? When do both specialized cities and diversified cities coexist? What determines the number and sizes of cities of different types in an economy? What are the factors that determine skill distribution and income disparities among different types of cities? What are the impacts of income inequalities on welfare? What are the tax and or subsidy scheme that would result in a Pareto-efficient allocation of resources in a system of cities? Do we need the intervention of federal government in order to achieve a Pareto-efficient allocation of resources in a system of cities? These questions are addressed in a spatial general equilibrium model of a closed economy consisting of a system of monocentric cities.