ENDOGENOUS FORMATION OF A CITY WITHOUT AGGLOMERATIVE EXTERNALITIES OR MARKET IMPERFECTIONS - MARKETPLACES IN A REGIONAL ECONOMY

This paper develops a general equilibrium model to endogenously generate a linear city. Rather than assuming agglomerative externalities or increasing returns in production/transportation technology, interregional transactions costs are considered. To rectify a deficiency associated with the standard continuum framework, we modify the concept of social optimum. A modified social optimum exists under appropriate assumptions and exhibits a concentrated market structure when there are high market set-up costs, thus yielding a unitary central business district. In an economy without trust, a standard monocentric city may emerge. The social optimum generating a monocentric city has competitive price support under proper assumptions.