The City as a Club

The paper presents a club theoretic model of a city. In the model welfare in a city depends on its size because of positive and negative externalities (or agglomeration economies and diseconomies) generated by close proximity of people and economic activities. Technological externalities appear in people’s utility functions and pecuniary externalities are due to shortcomings of the price mechanism. Both types of externalities are internalised in the city and act as centripetal and centrifugal forces that explain migration and thus the formation and development of the city. The issue of optimal city size is studied and it is found that the individually originated formation mechanism of the city may lead to non-optimal solutions.