1. As it stands, 'City' locationtype 0 is the main urban area on random random (after 'Capitol' locationtype 1); 'Town' locationtype 20 isn't set to show up in random games, doesn't have production, etc. BUT as noted that's where the fun comes in with the editor. As LJ noted, all of the relevant stats are changeable in the editor.
2. What I'm doing in a current project is creating a regime named 'None', which I paint the areas of the map I want to be off-limits to players (e.g. Switzerland). There's more than one way to skin the proverbial feline, of course, but I've found this suits my needs.