Should governments promote or restrain urbanization?

In a system of cities model that incorporates urban externalities, equilibrium city sizes deviate from optimal city sizes, which suggests a role for government intervention. Using a general equilibrium framework that incorporates agglomeration benefits and costs and that is calibrated to data from China between 2000 and 2020, we show that it is generally welfare-reducing to control city sizes through internal migration restrictions since the frictions they introduce outweigh the benefits of correcting for city size deviations. However, we also find that most large Chinese cities have already surpassed the optimal sizes from their local perspective, so without controlling city sizes, the average welfare of city residents would decrease. This suggests that a combination of policies is needed to both improve aggregate welfare and alleviate the distributional consequences for a rapidly urbanizing country.