The point is expansion must have a penalty (and a fairly steep one) to balance the benefits(which are more the earlier you expand).
To make it a difficult trade off in the early game I would make settlers actually very expensive...have that expense increase the more settlers/cities you have, and possibly include something to encourage late settling (like the tech/civic idea)
You could also tune down the benefit of an early city (making it slower to grow for example)
I see a "penalty" as extra-costs which are added to the opportunity-costs of expanding ... the penalty will force players to adjust their play-style to the penalty-system ... the result will be like in Civ5 where the global-happiness forced AI to settle on stupid places near new luxuries and often prevented them from building a functional, strong nation/empire ...
If settlers become more expensive, conquest becomes more attractive ... if costs of settlers raise with number of cities, conquest becomes more attractive and the result will be that a nation with a large number of maybe 100 cities won't be able to settle a single city and can only rely on conquest ... nobody wants such a game ...
(Rise of Nations (RTS) had a system of linearly increasing costs for everything and number of settlers was limited to something like 8 ... on the other side a single game of RoN often was finished after 15-30 min (depending on your nations accumulated boni) so you cannot compare it)
I posted the map sizes of Civ5 in a recent post ... it is a huge difference if playing on a duel map or on huge/giant ...
rules for expansion should be reasonable for all map sizes ... huge/giant has a lot more room for early expansion while a duel map has not ... One of the problems with National Wonders in Civ5 was that they do not scale well with bigger map size where players are intended to build more cities ... if a player doesn't want to build/conquer a lot of cities, he/she better plays on a smaller map ...
Civ5 boosted early expansion with Liberty (free Settler, +50% Settler-Production in Capital) and by providing a free, strong, build-in ranged city-attack which allowed to found new cities without guarding them ... I remember one of my 1st Civ1-games where I started, built a settler in my capital, founded my 2nd city and the very next turn a barbarian horseman destroyed it since it was undefended ... removing the boni for Settler-Production and reducing the city-defense and attack in Civ5 would increase opportunity-costs (settler, garrison) for expansion ...
Regarding the National Wonders in Civ5, I think it would have been a better design if they were simply tied to completing the Tradition-(Tall)-Tree instead of scaling costs with number of cities and having stupid requirements ... Liberty then would really represent the wide-tree and should be buffed with more per-city-boni to balance the game.
(Unfortunately buildings in Civ5 are tied only to opening a social policy tree, not finishing it.)