Question

China BAU Restrict BAU Restrict China Restrict BAU ealra impontaust WQ3. EXERCISE 4.14 NASH EQUILIBRIA AND CLIMATE CHANGE Think of the problem of climate change as a coordination game between two countries called China and the US. Each country has two possible strategies for addressing global carbon emissions:Restrict (taking measures to reduce emissions, for example by taxing the use of fossil fuels) andBAU (the Stern report's 'business as usual' scenario). Figure 4.17 describes the outcomes (renamed Fig.3a) and hypotheticapayoffs (Figs. 3b and 3c), on a scale from best, through good and bad, to worst. This is called an ordinal scale (because all that matters is the order: whether one outcome is better than the other, and not by how much it is better) Oukome hypethercnd pay ofR US US Fig. 3b US Fig. 3a Fig. 3c Restrict BAU Restrict BAU Restrict BAU GOOD BEST BEST GOOD Reduction in emissions sufficient to moderate climate change US free rides on Chinese emissions cutbacks GOOD WORST BEST WORST WORST BAD WORST BAD China free rides on US emissions cutbacks BAD GOOD BAD No reduction in emissions BEST WQ3. EXERCISE 4.14 NASH EQUILIBRIA AND CLIMATE CHANGE Show that both countries have a dominant strategy in Figure 3b. What is the dominant strategy equilibrium? Consider chaiina If Us choseAei ret whatis the hest us chose BANn resPon ce the me best responce Refer to payoffs in Figures 3b and 3c. The outcome would be better for both countries if they could negotiate a binding treaty to restrict emissions. Why might it be difficult to achieve this? assune-ssellist 2. Explain how the payoffs in Figure 3c could represent the situation if both countries wereinequality aversrand motivated byreciprocity, Show that there are two Nash equilibria. Would it be easier to negotiate a treaty in this case? 3. (same Yesult Coul comes) reciproa Restrct Restric epu, RA Not dlomainud slredegy Describe the changes in preferences or in some other aspect of the problem that would convert the game to one in which (like the invisible hand game) both countries choosing Restrict is a dominant strategy equilibrium. 4. Payaf! cheves frestrict, estnc punish the BAO paion elinate that uplik adisu,g fof the, bRu fosi on

Answer 1

Question 1.

(Pay off of China Paopf of UAE) Deninont te of what other agent te ng tlayd uapeeti ve choose tb UAE Restaicted BAU Good, Good) Restricted Cwarst, Best) Nash guiibu Aest wosest) BAU CBad Bad) to Lovoest - It is ginen that the osder from higheot Best > Good Baol> woest Poe China Best Reapmae then tay flayfng Rlays Reatnicted trategy TF UAE BAU gives ighen poyopf fo China Las Best > Good 7 BAU ves by hlay Hhen IF UAE oys BAU trateg dsi gher payoff to Cuina as ad woseit T China

chna's Deinant &tategy s to flay BAU daxareaive of uohar UAE pys For VAE Beat kespons IF China flays Rearnictd &tategy then UAE gots highex payopp Iie Beat] by taying BAU matead of flaying Rosticted Stnateg [payoff , Good Beat IP China fays BAU) thon UAE gets highaw payeoft Lfo e Baat by flay ng BAU insd of Maying ustleted atrategy gets Lovwer payoffL.e Nnst Bad So i UAE'S Dominant to Rlay BAU teg played by UAE meoheative of wnatever dtuteyy AS BAU is trayed by China

Question 2. It is impossible for countries to negotiate a binding treaty because the payoff from deviation, that is, playing BAU strategy gives higher payoff to both the countries. Therefore, countries are unwilling to bind to the treaty. And also large countries have different terms of negotiation that could benefit more their country irrespective to impact on other countries, which is why difficult to negotiate a binding treaty.

Question 3.

Suestion 1. UAE Restaicted Nadh BAU &Lat , Beat (worst, Good) Rstricted Good worsr gAU CBd d) Bad) eguithu Naah Best Responee of cuina 4 if UAE Rays Reatited tegy then Uhina gets higher Dayoff Lise Bust, wohene Best > Good LPayoff Prom by Maying Reataed rategy L tf UAE fays BAU thn China ges hgher payoff Ce Bad, howich is moe than warat [PayofF Prom playing Resticte ol playing BAu) AU] China

Reat Reapsnse of UAE ushen China pays Reetcteted Seagy teem VAG bittw Df laging Rastcted dategy Cas get payoft of Beat ushi dh is Wigher Ly whan cuina flays playfng eaurategy Cn Bad, wuich is mone tham payopf of vo0nst m est nicted Itnategy J. EAU BAU 2 1 tham AE hiter off getting higher payop o pdaging Sntenaiction of Rest Reaponas of uina & UAE two Nash the 2ilhriun Fives CResricted, Raaticted Roth layuus phays Rututed staatega PUAE, UAE 1 Both th atratar playins flays VAE motivated aiven situation/ payoff matnin by RECIPROCITY, As if anyons country tares good aoti'on by fayng Reatricted tategy then otner tue Rostiteal stnategy good reiprocales to faying tise taking g0od acttrn in aponse to thayid by other conty 7. nequality flayers foys Inaguasity is prssine, that is action uiitbutun AS averse, And it also EF both the sk ejuiibiumLRestsct Reataired that that emissfon contnsl aveuse are As an mdutoten faguaricy ase of no both the conttes 2 not fust sutry Gne of And imi tauy L BAU) BAU] that , caa a contnol s nduntaken is none out dvynaiy of the tuo. That burden notblas by but aue ehsel

Question 4.

estion. Cab) US Reatrict 8AU Bust st Bad, Gooed Rest ict 1 BAU Good, Bad fo Botu the players doninomt atatey s to Restnit stratay Posable that h'ghee detuuns to esonmy if plays Restaict &tnnbegy. As cooumers value the eeo- Frlendly frooluiet. And ndetariny serategy that take measwres to eduee emission. So, cou s Betten off playng Restait dtatgy duespeetive of nohatevere other conty payso so, Reattict Ibict wofu or Dominat staategy VAE