ABSTRACT Contrary to the predictions of the basic spatial equilibrium model, the long-run distribution of population across rural U.S. counties with high-valued natural amenities has become relatively more concentrated versus dispersed. We provide an explanation by developing a two-region model with mobile labor, production externalities and endogenous natural amenities. We find that strong preferences for natural amenities generally foster population dispersion. However, such preferences can also lead to population concentration when ecological degradation is low and man-made capital is a relatively scarce input into natural amenity production. Investments that enhance natural amenities are found to reduce the divergence between the steady state and optimal outcomes.