Using Taxonomies instead of categories and permalinks

I have a travel blog. I want to use Taxonomies by adding the city name for each post (Taxonomy: City -> CityName_1, City_Name_2 ..). I have a few questions:

1) Can I use Taxonomy as part of the URL for grouping related posts (ie. city/new-york/) and have the posts appear under that url?

2) Can I use taxonomies instead of categories?

3) Does W3 Total Cache plugin will cache the taxonomy URLs?

4) Any recommended plugin for easily add and edit taxonomies within WordPress administration?

Need your help with this.

Thanks!