Abstract
This paper introduces a clear distinction between interregional and intraregional transportation cost in a mixed New Economic Geography and Urban Economics model (Krugman and Livas Elizondo 1996; Martin and Rogers 1995). With the assumptions that public spending on transport infrastructure has some different effects on city size and welfare, and that it is financed by a proportional tax on regional income, an absence of regulation enables productive activities to agglomerate in the most favored region. Considering the presence of urban costs (e.g. commuting costs and land rents), public transport policy for developed countries can be used as a strategic instrument for regional planning, leading to a decrease in the spatial size of cities.