This paper investigates positive and normative aspects of population distribution 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 normative 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 allocation. 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. © 2003 Elsevier B.V. All rights reserved.
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