New Economic Geography (NEG) theory posits that cities arise because the location of economic
activity is influenced by market size, transportation cost, and economies of scale (Krugman & LizasElizondo
1996). Krugman (1991) develops a two-region economy where there is tension between
agglomeration (or the “centripetal” force) arising from economies of scale plus transport costs, while
pressures for dispersion (or the “centrifugal” force) arises from the transport costs to dispersed immobile
farmers. He argues that manufacturing firms will try to locate themselves in or near a region with
large demand for their products, but that city size will be limited by congestion costs.