This paper reviews the literature on urban externalities, and It proposes a simple urban general equilibrium model of the interactions between agglomeration externalities (positive benefits of city adjacencies) and pollution from commuting. Results show a simultaneous stimulation of agglomeration externalities and a reduction of environmental externalities, the outcome of first-best policies. Moreover, while incentives from road pricing and labour subsidies would seem to be perfectly opposite in a non-spatial setting, leaving one of the two instruments redundant, results show that their welfare effects may, in contrast, turn out to be strongly super-additive when a spatial perspective is taken.