While the existence of cities can only persist if the advantages outweigh the disadvantages, agglomeration can also lead to traffic congestion, pollution and other negative externalities caused by the agglomeration of a group of companies and people and this can lead to diseconomies of scale. Another source of diseconomies of agglomeration—increased overcrowding and increased waiting times—can be observed in disciplines or industries that are characterized by access restricted to production facilities or resources.[2]​ As stated above, these factors are what decrease the pricing power of companies, due to the many competitors in the area, as well as labor shortages and lack of flexibility in companies and their workers. Large cities experience these problems, and it is this tension between the economies and diseconomies of agglomeration that can contribute to the growth of the area, control the growth of the area, or cause the area to experience a lack of growth. The ways to maintain a stable outcome for agglomeration economies is to create clusters for “knowledge diffusion” that prevail over these negative externalities.

There are two types of economies that are considered large scale and have external economies of scale: localization economies and urbanization economies. Location economies arise from many companies in the same industry located near each other. There are three sources of localization economies: The first is the benefit of labor pooling, which is the accessibility that companies have to a variety of skilled workers, which in turn offers employment opportunities for workers. The second benefit is the development of industries due to increasing returns to scale in intermediate inputs to a product; and the third source is the relative ease of communication and exchange of construction materials, workers and innovative ideas due to the proximity between companies.

While localization and urbanization economies, as well as their sources, are crucial for the maintenance of agglomeration economies and cities, it is important to understand the long-term outcome of the function of agglomeration economies as it relates to the core-periphery model. The core-periphery model basically characterizes a quantity of economic activity in a core area surrounded by a remote area of ​​less dense activity. The concentration of this economic activity in one area (usually the city center) allows the growth and expansion of activity in other and surrounding areas due to the location and cost minimization decisions of companies within these agglomeration economies sustaining high productivity and advantages which therefore allows them to grow outside the city (core) and on the periphery. A small decrease in the fixed cost of production can increase the range of locations for subsequent establishment of businesses leading to loss of concentration in the city and possibly the development of a new city outside the original city where agglomeration and increasing returns to scale existed.

If localization economies were the main contributing factor to why cities exist to the exclusion of urbanization economies, then it would make sense for each company in the same industry to form its own city. However, in a more realistic sense cities are more complex than that, which is the reason for the combination of location economies and urbanization to form large cities.

The sharing of the labor market arises from the location of companies. Large populations of skilled workers enter the area and are able to exchange knowledge, ideas and information. The more firms there are in this area, the greater the competition is for obtaining workers and therefore results in higher wages for workers. However, the fewer companies there are and the more workers there are, the lower the salary for the workers will be.

The second contribution to localization economies is access to specialized goods and services for the companies in the cluster. This access to specialized goods and services are known as intermediate inputs and provides increasing returns to scale to each of the companies located within that area due to the proximity of available sources necessary for production. If intermediate inputs are tradable, they form a notion of center-periphery that will have many companies located close to each other and in turn close to their necessary sources. If there are nearby tradable resources and services, but no related industries in the same area, no network ties exist and therefore makes it difficult for all firms in the area to obtain the resources and increase production. Transportation costs associated with decreased clustering of firms leads to an increase in the likelihood of a core-periphery pattern; where the result of this will be more intermediate inputs will be focused on the center and therefore will attract more companies from related sectors.

The third source in relation to localization economies is "technological spillover." A final advantage of this source is that grouping into specific fields leads to faster diffusion of ideas or adoption of ideas. For production to be brought to its maximum level and their products to be sold, companies require some type of viable access to capital markets. New forms of technology can create problems and involve risks; Clustering companies creates an advantage of reducing the amount of uncertainty and complications involved with the use of new technologies through information flow. Banking businesses and technology are concentrated in specific areas and therefore the company located near these areas benefits. This technological impact specifically in the field of communications will provide and limit the barrier between companies in the same sector located further away as well as the surrounding area, which would lead to a greater concentration of information flow and economic production and activity. Additionally, technology spillovers may be more beneficial to smaller cities in their growth than larger cities because of the existing information networks in large cities that they have already helped form and grow.

Achieving agglomeration economies is the reason why many US state governments redistribute income from their affluent suburbs to poorer urban localities. This is often accomplished through grants to local governments according to criteria that favor low-income communities. Suburbanites benefit from this redistribution, because many work in cities and visit city centers that would not be sustainable on their own tax revenues. For example, cities that cannot afford to offer adequate fire and police protection or schools are not places where businesses want to establish themselves, and therefore cannot maximize the agglomeration effect without this type of income redistribution.[3]​.

While the existence of cities can only persist if the advantages outweigh the disadvantages, agglomeration can also lead to traffic congestion, pollution and other negative externalities caused by the agglomeration of a group of companies and people and this can lead to diseconomies of scale. Another source of diseconomies of agglomeration—increased overcrowding and increased waiting times—can be observed in disciplines or industries that are characterized by access restricted to production facilities or resources.[2]​ As stated above, these factors are what decrease the pricing power of companies, due to the many competitors in the area, as well as labor shortages and lack of flexibility in companies and their workers. Large cities experience these problems, and it is this tension between the economies and diseconomies of agglomeration that can contribute to the growth of the area, control the growth of the area, or cause the area to experience a lack of growth. The ways to maintain a stable outcome for agglomeration economies is to create clusters for “knowledge diffusion” that prevail over these negative externalities.

There are two types of economies that are considered large scale and have external economies of scale: localization economies and urbanization economies. Location economies arise from many companies in the same industry located near each other. There are three sources of localization economies: The first is the benefit of labor pooling, which is the accessibility that companies have to a variety of skilled workers, which in turn offers employment opportunities for workers. The second benefit is the development of industries due to increasing returns to scale in intermediate inputs to a product; and the third source is the relative ease of communication and exchange of construction materials, workers and innovative ideas due to the proximity between companies.

While localization and urbanization economies, as well as their sources, are crucial for the maintenance of agglomeration economies and cities, it is important to understand the long-term outcome of the function of agglomeration economies as it relates to the core-periphery model. The core-periphery model basically characterizes a quantity of economic activity in a core area surrounded by a remote area of ​​less dense activity. The concentration of this economic activity in one area (usually the city center) allows the growth and expansion of activity in other and surrounding areas due to the location and cost minimization decisions of companies within these agglomeration economies sustaining high productivity and advantages which therefore allows them to grow outside the city (core) and on the periphery. A small decrease in the fixed cost of production can increase the range of locations for subsequent establishment of businesses leading to loss of concentration in the city and possibly the development of a new city outside the original city where agglomeration and increasing returns to scale existed.

If localization economies were the main contributing factor to why cities exist to the exclusion of urbanization economies, then it would make sense for each company in the same industry to form its own city. However, in a more realistic sense cities are more complex than that, which is the reason for the combination of location economies and urbanization to form large cities.

The sharing of the labor market arises from the location of companies. Large populations of skilled workers enter the area and are able to exchange knowledge, ideas and information. The more firms there are in this area, the greater the competition is for obtaining workers and therefore results in higher wages for workers. However, the fewer companies there are and the more workers there are, the lower the salary for the workers will be.

The second contribution to localization economies is access to specialized goods and services for the companies in the cluster. This access to specialized goods and services are known as intermediate inputs and provides increasing returns to scale to each of the companies located within that area due to the proximity of available sources necessary for production. If intermediate inputs are tradable, they form a notion of center-periphery that will have many companies located close to each other and in turn close to their necessary sources. If there are nearby tradable resources and services, but no related industries in the same area, no network ties exist and therefore makes it difficult for all firms in the area to obtain the resources and increase production. Transportation costs associated with decreased clustering of firms leads to an increase in the likelihood of a core-periphery pattern; where the result of this will be more intermediate inputs will be focused on the center and therefore will attract more companies from related sectors.

The third source in relation to localization economies is "technological spillover." A final advantage of this source is that grouping into specific fields leads to faster diffusion of ideas or adoption of ideas. For production to be brought to its maximum level and their products to be sold, companies require some type of viable access to capital markets. New forms of technology can create problems and involve risks; Clustering companies creates an advantage of reducing the amount of uncertainty and complications involved with the use of new technologies through information flow. Banking businesses and technology are concentrated in specific areas and therefore the company located near these areas benefits. This technological impact specifically in the field of communications will provide and limit the barrier between companies in the same sector located further away as well as the surrounding area, which would lead to a greater concentration of information flow and economic production and activity. Additionally, technology spillovers may be more beneficial to smaller cities in their growth than larger cities because of the existing information networks in large cities that they have already helped form and grow.

Achieving agglomeration economies is the reason why many US state governments redistribute income from their affluent suburbs to poorer urban localities. This is often accomplished through grants to local governments according to criteria that favor low-income communities. Suburbanites benefit from this redistribution, because many work in cities and visit city centers that would not be sustainable on their own tax revenues. For example, cities that cannot afford to offer adequate fire and police protection or schools are not places where businesses want to establish themselves, and therefore cannot maximize the agglomeration effect without this type of income redistribution.[3]​.