Question

2. We discussed public goods. Pollution is sometimes considered as a public bad in the sense that it affects all negatively regardless of who produces it. Consider two countries A and B. All values and costs are in billions of dollars. If a country chooses a low level of pollution, then the value of production in that country is 500, and it imposes a cost of 10 on each country. If a country chooses a high level of pollution then the value of production in that country is 600, but it imposes a cost of 80 on each country 9 0 (a) Treating the countries strategies as the choice of High (H) or Low (L) pollution levels chosen independently and simultaneously, write this down as a game matrix between country A and country B. The payoff to a country is the value of production minus the total cost of pollution. Note that the total cost of pollution on each country is either 20 (both choose L), 90 (one chooses L), or 160 (both choose H) (5 marks)

Answer 1

c) To cooperate is to choose (L, L) as the payoff is Pareto superior to (H, H) which is Nash equilibrium. Hence, grim trigger strategy can be used to achieve (L, L) in an infinite game which is a more efficient outcome than (H, H)