Economic theories of systems of cities explain why production and consumption activities are concentrated in a number of urban areas of different sizes and industrial composition rather than uniformly distributed in space. These theories have been successively influenced by four paradigms: i) conventional urban economics emphasizing the tension between economies due to the spatial concentration of activity and diseconomies arising from that concentration; ii) the theory of industrial organization as it relates to inter-industry linkages and to product differentiation; iii) the New Economic Geography which ignores land markets but emphasizes trade among cities, fixed agricultural hinterlands and the endogenous emergence of geography; iv) the theory of endogenous economic growth. Among the issues examined are specialization versus diversification of cities in systems of cities, how city systems contribute to increasing returns in national and the global economies, the factors that determine skill distribution and income disparity between cities, the impacts of income disparity on welfare, whether population growth should cause economic activity to become more or less concentrated in urban areas, and how resources should be allocated efficiently in a system of cities. Related to the last issue we consider models where cities are organized by local planners or developers as well as cities that self organize by atomistic actions. A conclusion of the theoretical study of city systems is that markets fail in efficiently allocating resources across cities when certain intercity interactions are present and that a role for central planning may be necessary.

This paper investigates positive and normative aspects of population distri-bution among cities when aggregate population is growing. On the positive level, the paper investigates how different allocation regimes, on the one hand, and different elasticities of substitution between housing and differentiated products, on the other, affect the characteristics of city-size distribution. On the norma-tive level, the paper investigates the potential sources of market failures and their policy implications. It is shown that the sources of market failures are rent-sharing externality, price markup, and multiple equilibria. Because of the latter, a straightforward elimination of the rent-sharing externality and the price markup may reduce welfare even below its achievable level under laissez-faire al-location. It depends on the stage of the aggregate population growth at the time when the policy is introduced (i.e., history matters). When the social planner is fully informed, a transfer scheme which induces the economy to convergence to the global optima can be designed.

Traditionally, mainstream economics has largely neglected the location of economic ac-tivity, that is, the choices of consumers and producers about where to consume and where to produce as well as how these two sides of optimal decision making interact. Finally, since 1990s, theoretical and empirical work began to emphasize the importance of spatial aspects of the economy and transportation. Much of this work is pioneered by Paul Krugman, who won the 2008 Nobel economics prize for his analysis of trade patterns and location of economic activity. This paper summarizes Krugman's ideas in a comparative framework and analyses the contributions of new economic geography to regional, urban and international economics.

Abstract: Economic theories of systems of cities explain why production and consumption activities are concentrated in a number of urban areas of different sizes and industrial composition rather than uniformly distributed in space. These theories have been successively influenced by four paradigms: i) conventional urban economics emphasizing the tension between economies due to the spatial concentration of activity and diseconomies arising from that concentration; ii) the theory of industrial organization as it relates to inter-industry linkages and to product differentiation; iii) the New Economic Geography which ignores land markets but emphasizes trade among cities, fixed agricultural hinterlands and the endogenous emergence of geography; iv) the theory of endogenous economic growth. Among the issues examined are specialization versus diversification of cities in systems of cities, how city systems contribute to increasing returns in national and the global economies, the factors that determine skill distribution and income disparity between cities, the impacts of income disparity on welfare, whether population growth should cause economic activity to become more or less concentrated in urban areas, and how resources should be allocated efficiently in a system of cities. Related to the last issue we consider models where cities are organized by local planners or developers as well as cities that