Urban Costs and their Role in a Central Places Theory a la Christaller-Loesch

One of the most striking feature of the spatial economy is that cities form a hierarchical system exhibiting some regularity in terms of their size and the Public goods they supply. In order to show how such a hierarchical system may emerge, we consider a spatial economy model with monopolistic competitive markets for the multiple industrial sectors. As transport costs of trade assumed to be negligible, the key role in the urban system formation plays urban costs, which are the sum of a housing expenditures (e.g., rent) and commuting costs of worker's transporting from home to the job place. Unlike the product transport costs, these ones are significant for the large cities, impeding to their unbounded growth and playing the role of dispersion forces. Agglomeration effect, in turn, is based on the local non-tradable public goods, which attract the people from settlemens of the lower rank. It is shown that this model generates the unique equilibrium outcome, which demonstrate the real urban hierarchic structures' features.