If suburbs weren't subsidized, these people and businesses would reside closer to the city centre. This wouldn't impair city's functions in any way, but would save lots of money for the taxpayers.
I think a lot of that would happen. The would also be a lot of people who would reconfigure themselves as spokes about the hub of a rail or Transit stop. And my experience with places like that suggests to me that the net effect for everyone in the city is that it would be easier to get out into the countryside, despite there being less road capacity and more people.
Anyone who's spent time in DC can probably attest to what a pilgrimage it can seem just to escape.
