Low population density and large distance from civilization centers generate high costs of isolation. Immigration reduces these costs for veteran residents but reduces social and cultural cohesion, increases the demand for scarce resources and affects the rate of urban unemployment. An expected net benefit maximization model for determining the optimal population size and the equilibrium urban-rural composition of an island similar to Australia is constructed. The model is simulated for various agricultural water prices. The simulation results illustrate the central role of the effect of immigration on urban unemployment rate in the determination of the island’s optimal population size.
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