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Game Theory Applications

Free Market

Game Theory -

Public Good

Liability Law Apparoach

e.g Taxation, Fines etc..

Pros: It would reduce the level of

"pollution" / Negative Externalities

It has moral appeal - because its based on the premise of punishing the prepetrator

Cons: Monitoring costs are high

Legal remedies are slow and costly

Often leads to complex questions that judges and juries find difficult to follow

Depends on formulas specified for calculating the exact amount of tax/ penalty

Works best if the number is small and their victims are easily identified

Law suits maybe unfair if the damaged individuals don't have the resources to undertake law suits

If the number of parties is large - it is difficult to determine who was liable to what degree

Property Rights Approach

Professor Ronald Coase - University of Chicago- (Also known as The Coase Theorem)

He proposed that "simply by assigning property rights we can overcome the externality " ... so how does this work ?

Pros: Assignment can be complety arbitary but it will lead to a optimum reduction in pollution

Reduces the role of public prosecutors

Optimal level of pollution is determined by voluntary negotiations of private parties

Cons: Property rights must be well defined, enforceable and tansferable

High transaction costs - due to negotiations

It assumes the continuity of the business

Intertemporal barganing is difficult

Voluntary Actions Approach

(not mandated by laws or regulations) --- when might this work ?

It works when people have strong social conscience

(but since wealthier consumers are more likely to pay for "green goods" - there is avenue for price discrimiation

Moral Suasion - is about promoting ethically driven actions (part information / part persuasion - i.e people case but don't fully understand the environmental damage of their actions)

But the problem is not all people respond equally

Market Driven Voluntary Action -

Based on Margolis (2007) - Harvard Business School - showed a positive relationship between running a socially responsible business and finanical performance

Travel Cost Valuations

Indirect Method that assumes that it should be possible to infer the value people place on a environmental amenity based on the amount of money they spend to get there

Involves doing surveys and running regression or monte carlo type models

Cons: there is ommited variable bias (i.e based on your regression equation)

Not applicable to things like air quality

Contingent Valuation

Relies on people to state the value they place on an environmental good

Pros:

It can deal with use and non use existence values (not just places people travel to) - and relatively simple

You can ask about both "willingness to pay" and "willingness to accept" for environmental damage

Cons:

If you ask hypotetical questions you will get hypothetical answers -

Not a ture measure of if people will commit to the amount they state

Hedonic Price Method

Indirect method that assumes that goods are valued for their attributes.

Common application: air quality and house prices !

Cons:

Need lots of data .. i.e house sales and air quality

Omitted variable bias (i.e NO2 may be associated with particles that are harmful but not NO2)

Damage Funtion Method

Simple method - that relates the damage caused by the contaminats - most common for legal cases

Cons:

Need to know relationships between damages and contaminants

Adverting Expenditue Method

Relates changes in goods that are substitutes for environmental goods - ie drinking water vs bottled water sales

Cons: Some people might just like buying bottled wated

Public Opinion on Economic Growth and Human Wellbeing

Economic Growth is an important consideration to environmental economics because it is used as an argument for "prosperity" ....

Prosperity as Oppulance

Prosperity as Utility

Prosperity as Capabilities flourishing

Is economic growth necessary for prosperity ?

Methods of Environmental Evaluation

Managing Environmental Externality

Bigger share of the pie ? or is the pie itself big enough ?

Introduction to

Environmental Economics Concepts

Game Theory

Game Theory and The Nash Equilibrium

John Nash (1928- 2015)

Confess

Stay Quiet

Do Nothing

Advertise

Person A

3 0

Pay a Price

1 1

50 x $2 = $100

30 x $2 = $60

Stay Quiet

Do Nothing

70 x $2 - $20 = $120

50 x $2 = $100

-$10 + $20 = $10

-$10 + $10 = $0

Pay a Price

2 2

-$10 +$20 = $10

0 3

Person B

Confess

-$0 +$10 = $10

70 x $2 - $20 = $120

50 x $2 - $20 = $80

Advertise

50 x $2 - $20 = $80

30 x $2 = $60

-$0 + $10 = $10

Do Nothing

-$0 + $0 = $0

"The Prisoner's Dilemma"

-$10 + $0 = -$10

-$0 + $0 = $0

Game Theory

Thank you

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