Dipartimento di Pianificazione Università Iuav di Venezia* (Paper first received, May 2006; in final form, March 2007)Abstract Baumol’s model on cost disease was conceived with particular reference to the city, but this feature has been generally neglected in subsequent commentaries. This is why no relevant role is attributed to the city, which simply appears as a geographical element. As the place where stagnant activities are normally located, it is in the city that the cost disease reveals its most striking consequence: the existence of a dilemma between the maintenance of a balanced growth between the stagnant and the progressive sector, on the one hand, and the maintenance of a non-declining rate of growth of the whole economic system, on the other. Although the literature has mitigated the radical nature of the dilemma, it has not yet been resolved. This paper shows that it can be dissolved by introducing a hypothesis of endogenous development in which the particular conditions of dynamic proximity existing in the city play a fundamental role.