Is Population Dispersion Policy Necessary?.

It is common to explain the market failure in efficiently distributing the population among urban areas by externalities associated with unpriced transportation congestion and external scale economies in the supply of private and public goods. Consequently, in prescribing the appropriate corrective policy, Pigovian taxes and subsidies are considered to be the first-best while measures to directly affect the population distribution among cities are considered to be only second-best policy. This paper shows that the above diagnosis may be misleading and, consequently, the implied prescription may be either ineffective or even harmful. In such cases a population dispersion policy is necessary for achieving efficient resource allocation.