Several of you gave me things to think about. Two of you -- kris_schnee and foomf -- even gave me homework. I shall do this homework, albeit somewhat flippantly. I am not being flippant because the questions are bad or irrelevant -- the questions are quite good, and the answers matter. I am being flippant because I am tired and I do not wish to write very much today.
(By the way, why do fantasy races always seem to be Capitalized? We don't write about "Humans".) The names of prime species are given the markers of respect in the language and orthography in question. The names of non-prime species are not. Actually we are being relatively nice -- some orthographic systems don't capitalize the names of individual non-primes: "Vae" would be "vae" in such systems.
What's the purpose of a city? To provide a place where many primes or (and?) monsters may live comfortably, fashionably, safely, and happily in close proximity.
How is that different from the purpose of a government? Well, flippantly, a government is not a place. Less flippantly, I think governments have other purposes (some of them worthwhile).
Does government and governance require a city? I can't see why it does.
Can there be a form of governance that works for all sentients living in an area? If the area is small enough, yes. For an area that contains two or more sentients, I suspect not.
Why did Primes form cities in the first place? I'll have to ask a relative about that. My vague impression is no more than, "It seemed the thing to do at the time." Mutual defense and all was crucial. It still is.
Why did non-primes form their cities? I have no idea. I don't even know if there's anyone around to ask.
Why did Primes exclude non-primes from their cities? Mostly because non-primes exist to trouble us, and we don't want to be troubled that way at home. This reason still obtains.
What benefits accrue to forming a mixed-prime-and-non-prime city? Vae is a lot happier. Some foolish concept of justice that I seem to want to observe will be satisfied.
What detriments would be inevitable? Trouble. Lots and lots of trouble, of the forms suitable to the non-prime inhabitants.
What detriments would be easily managed? Um ... if we let taptet in, we could outlaw potion-making, I suppose.
Who decides on the form of governance? The founders of the city.
What do the Gods of the World Tree think about all this? I can't see why that could possibly matter. It's not as if they'll be nice to us even if they like it.