City living costs shaping urban hierarchy and limiting endless growth.
Cities form stable hierarchical systems based on population size and public goods provision. Urban costs, such as rent and commuting expenses, play a crucial role in shaping these city hierarchies. In a model with competitive markets and multiple industries, transportation costs are negligible, making urban costs the main factor limiting city size growth. Large cities experience significant cost dispersion, preventing unlimited expansion. The presence of agglomeration effects in this model is driven by the concentration of activities in cities.