1
Q
4.1 Climate negotiations: Conflicts and common interests
What are social interactions?
A
Situations in which the actions taken by each person affect other people’s outcomes as well as their own.
2
Q
4.1 Climate negotiations: Conflicts and common interests
When do social dilemmas arise?
A
When people do not take sufficient account of the effects their actions will have on others, both positive and negative
3
Q
4.1 Climate negotiations: Conflicts and common interests
What is the free-rider problem?
A
Someone who benefits from the contributions of others to a cooperative project without their own input.
4
Q
4.1 Climate negotiations: Conflicts and common interests
What is an altruistic action?
A
Altriustic actions are tasks done for the beenfit of others, while the individual themself bears a cost.
5
Q
4.1 Climate negotiations: Conflicts and common interests
How does altruism pertain to social dilemma?
A
Altruistic behaviour helps social dilemmas as this accounts for affect of actions on others. Altruism is not sufficient to deal with dilemma such as climate change (requires new government policies e.g. landfill tax)
6
Q
4.2 Social interactions: Game theory
What are the characteristics of social interaction?
A
- Two or more people
- Actions taken by each person affect their own outcome as well as others
7
Q
4.2 Social interactions: Game theory
Define strategic interaction
A
When participants are aware of the way their actions affect others and vice versa
8
Q
4.2 Social interactions: Game theory
Define strategy
A
The action that one chooses when aware of the potential consequence this has on others as well as themselves
9
Q
4.2 Social interactions: Game theory
Define games
A
Models of strategic interaction
10
Q
4.2 Social interactions: Game theory
Define game theory
A
A set of models of strategic interactions.
11
Q
4.2 Social interactions: Game theory
Who is the row player and who is the coloumn player?
A
Anil-row
Bala-coloumn
12
Q
To simplify the game theory model involving two participants what assumptions are made?
A
- No other participants are involved
- They interact just once -> one-shot game
- Only make one decision (in this case which crop)
- Simultaneous game -> players make their decision at the same time without knowledge of the other players choice
5.
13
Q
4.2 Social interactions: Game theory
Given that the diagram below are the pay offs for this game what would be the ideal situation to choose?
A
Highest pay off is obtained when Bala specialises in Rice and Anil specialises in Cassava
14
Q
4.2 Social interactions: Game theory
What are pay offs?
A
The pay-off for an individual player in a game is the benefit that the player receives as a result of the joint actions of all the players.
15
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What is best response (defined in terms of Game theory)?
A
In game theory, a player’s best response is the strategy that will bring about the player’s most-preferred outcome, given the strategies adopted by the other players.
16
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What is the standard form used to describe the payoffs in a two player game?
A
A pay-off matrix
17
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
In this pay off matrix what is best response for each player?
A
FOR ANIL:
Bala (Rice): Anil should choose Cassava (6>4)
Bala (Cassava): Anil should choose Rice (6>5)
FOR BALA:
Anil (Rice): Bala should choose Rice (4>3)
Anil (Cassava): Bala should choose Rice (6>2)
18
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What is the mutual best response in this pay off matrix?
A
Bala choosing Rice while Anil chooses Cassava this is the best response for each other.
19
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What is an equilibrium in a game?
A
A self perpetuating outcome where if reached neither participant will change their decision unless an external force disturbs it.
* By an ‘external force’, we mean something that is determined outside the model.
20
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What is a Nash equilibrium?
A
An outcome where the no unilateral change made by any individuals could bring about a preferred outcome.
- In game theory this is the set of strategies (one for each player) by which the strategy chosen by the individual is the best response to the strategies chosen by others
21
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
What does the shorthand Nash equilbrium (Cassava,Rice) suggest?
A
The row player picked Cassava and the column player picked Rice.
22
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
If a game has only one Nash equilibrium…
A
this is the most plausible outcome.
23
Q
4.3 Best responses in the rice–cassava game: Nash equilibrium
Define an invisible hand game
A
Has the property that players acting independently in their own self-interest reach an equilibrium that is in the joint interest of the players involved.
24
Q
4.4 Dominant strategy equilibrium and the prisoners’ dilemma
What is a dominant strategy?
A
When one option is the best response for an individual regardless of what their opponent picks.
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# 4.4 Dominant strategy equilibrium and the prisoners’ dilemma
What is a dominant strategy equilibrium?
- A dominant strategy equilibrium is a Nash equilibrium in which the strategies of all players are dominant stategies.
- Beneficial to both players
- Invisible hand game
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# 4.4 Dominant strategy equilibrium and the prisoners’ dilemma
What is the dominant strategy for each players and why is this considered a prisoners dilemma?
Both will likely use Toxic Tide as this is both of their dominant strategy. This is considered a prisoners dilemma as the game has a dominant strategy equilibrium, but also has an alternative outcome that gives a higher pay-off to all players. So the Nash equilibrium is not Pareto efficient.
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# 4.4 Dominant strategy equilibrium and the prisoners’ dilemma
In a prisoners dilemma, what is the mutually beneficial strategy and the dominant strategy termed as?
Mutually beneficial = Cooperate
Dominant = Defect
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# 4.4 Dominant strategy equilibrium and the prisoners’ dilemma
Define Pareto efficient
An allocation is Pareto efficient if there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off.
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# 4.4 Dominant strategy equilibrium and the prisoners’ dilemma
What is an externality?
An external effect occurs when a person’s action confers a benefit or imposes a cost on others and this cost or benefit is not taken into account by the individual taking the action. External effects are also called externalities.
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# 4.5 Evaluating outcomes: The Pareto criterion
What is an allocation?
An allocation is a particular distribution of goods or other things of value to all participants.
- outcome of an economic interaction\
- e.g. if two firms compete for selling goods in a market, the allocation is profits for each firm
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# 4.5 Evaluating outcomes: The Pareto criterion
What is the pareto criterion?
A method used to compare two allocations.
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# 4.5 Evaluating outcomes: The Pareto criterion
What are the conditions for pareto domination?
If at least one individual prefers allocation A over B (suggesting they are better of with A over B strictly), AND nobody is worse off then A pareto dominates B.
For one to prefer an allocation, they dont necessarily need to be gaining more money.
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# 4.5 Evaluating outcomes: The Pareto criterion
In this situation what would be Pareto-dominant?
Both players using IPC over Toxic Tide.
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# 4.5 Evaluating outcomes: The Pareto criterion
Explain how to compare the four allocations in this game graphically compared to (T,T)?
Rectangle above the point represents possible better outcomes.
(I,I) rectangle is completely inside the (T,T) rectangle meaning when considering the outcomes of these two allocations (I,I) Pareto dominates (T,T).
No allocation is above (I,I) so no available better outcomes.
When (T,I) is employed, Anil is better off (4>2) and Bala is worse off (1<2). Pareto criterion cannot determine which of these is better. (vice versa logic for (I,T)
- Notably these allocations are not Pareto dominated but also do not dominate other allocations
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# 4.5 Evaluating outcomes: The Pareto criterion
Does the Pareto criterion rank (I,I) over (T,I)?
* No
* It does not make judgement beyond one that is better for at least one person and worse of for noone
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# 4.5 Evaluating outcomes: The Pareto criterion
Define pareto efficient
An allocation is Pareto efficient if there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off.
- Not pareto dominated by anything else
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# 4.5 Evaluating outcomes: The Pareto criterion
Why can many allocations be pareto efficient?
The pareto criterion is cautious about ranking allocation, so many allocations are considered efficient. For example if moving from one allocation would cause even one player to be worse off, the original allocation is considered efficient.
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# 4.5 Evaluating outcomes: The Pareto criterion
Why is it important to be cautious using pareto efficiency as a term and in practice?
* Can be more than one pareto efficinet allocation (all except something that is pareto- dominated)
* Pareto efficiency cannot rank the pareto-efficient allocations
* Pareto efficient allocations are still not always better than something Pareto inefficient ( C may not completely dominate B, but B is dominated by A, so while B is inefficient it is not dominated by C so we cannot state that C is better than B)
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# 4.5 Evaluating outcomes: The Pareto criterion
If something Pareto-dominates all other allocations...
It is the only Pareto-efficient allocation.
- Nash equilibrium gives the most desirable outcome
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# 4.5 Evaluating outcomes: The Pareto criterion
If players both have a dominant strategy equilibrium (that they choose to use) that is Pareto dominated what does this mean?
They pick a pareto inefficient choce -> Prisoners dilemma, there is an alternative cooperative outcome that the players would prefer. Following their dominant strategies, they will not achieve this.
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# 4.5 Evaluating outcomes: The Pareto criterion
In the prisoners dilemma, why do players not choose the cooperative strategy?
The cooperative allocation does not Pareto-dominate all choices, therefore players choose dominant over cooperative strategies.
42
# 4.6 Public good games and cooperation
4 Farmers each contribute 10 pounds, and that yields 8 pounds of benefit. Given that 2 farmers contribute, if kim does and does not contribute to this what will her net benefit be. Is her payoff higher or lower if she contributes?
Kims pay off is always higher if she does not contribute
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# 4.6 Public good games and cooperation
4 Farmers each contribute 10 pounds, and that yields 8 pounds of benefit. Given that you can choose to contribute or not. Calculate 1 farmers pay off in every game
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# 4.6 Public good games and cooperation
What is a public good game?
A public good game is a game in which individual players can take an action that would be costly to themselves, but would produce benefits for all players (including themselves).
45
# 4.6 Public good games and cooperation
What are the two options in a public good game that every player can take?
They can contribute or free ride
46
# 4.6 Public good games and cooperation
Why do public good games create social dilemmas?
No cost is incurred if an individual does not contribute, therefore many choose to free ride as it often yields more benefit
47
# 4.6 Public good games and cooperation
In a public good game where the cost is 10 pounds and contribution of each player yields 8 pounds profit what economic problem does this pose?
This creates a prisoners dilemma. The dominant strategy is to not contribute if farmers only care about monetary value. Therefore all payoffs may be 0, but if all contribute the value would be 22 pounds. Everyone benefits if everyone cooperates but given that everyone else cooperates an individual benefits more by not cooperating.
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# 4.6 Public good games and cooperation
Why is a public good game modelled only on monetary value not always a good model?
Behaviour does not always reflect self interested (monetary focused) preferences.
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# 4.6 Public good games and cooperation
What is the difference between common property and open-access resources?
Common property is a well define community of users (if not under law prevents outsiders from exploiting it)
Open access resources can be exploited by outsiders if not restricted by regulations within states acting alone or international agreement.
50
# 4.6 Public good games and cooperation
Define social norms in terms of how common property is managed
An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others.
- used to conserve natural resource
- individuals are willing to bear costs to punish violators of these norms
51
# 4.6 Public good games and cooperation
Why might someone not pick a dominant strategy, reflected in findings that suggest in 20% of prison dilemma games people choose to cooperate? Why does this increase to 50% with repeated games with the same opponent?
Players feel altruistic towards their opponent. In repeated games, to establish cooperation, players may think their opponent will be altruistic and develop the reputation to cooperate with them.
52
# 4.6 Public good games and cooperation
What is tragedy of the commons?
Individuals overuse and deplete a shared, unregulated resource, acting in their own self-interest to the detriment of the collective group
53
# 4.7 Social preferences: Altruism
If individuals are self interested what are the only things affecting their utility?
The goods they obtain for themselves (e.g. own consumption and their own leisure)
54
# 4.7 Social preferences: Altruism
what are social preferences and examples of it?
An individual is said to have social preferences if their individual utility depends on what happens to other people, as well as on their own pay-offs.
1. Altruism-Utility increases based on benefit for others
2. Inequality Aversion-More equal outcomes
3. Spite and envy- benefit to others decreases an individuals utility
55
# 4.7 Social preferences: Altruism
If Zoe is faced with a decision to share or keep money for herself is this a game?
NO- this involves a sole decision maker, therefore zoes decision can only be graphically modelled using indifference curves.
56
# 4.7 Social preferences: Altruism
Describe the shape of the indifference curves dependent on the individual making a monetary decision (share money or keep for themselves) if they are acting altruistically or in self interest
57
# 4.7 Social preferences: Altruism
What does this graph suggest about Zoes utility?
The more money she is given, the more utility she gains, as well as utility gained by Yvonne. Indifference curve slopes downwards suggesting she is willing to share some of her money with Yvonne.
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# 4.7 Social preferences: Altruism
What does this graph suggest about Zoe's utility?
The amount of money given to Yvonne has no effect on her utility, her utility only increases based on the money she receives herself.
59
# 4.7 Social preferences: Altruism
Dependent on if Zoe is more or less altruistic how does this change the shape of the curve?
If she is more altruistic, the curve is steeper and if she is less altruistic, the curve is flatter.
To remember this, think about how the line is completely vertical in complete self interest.
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# 4.7 Social preferences: Altruism
Given that 200 pounds is Zoe's feasible set, how much will she keep and how much will she give away with altruistic preferences on this graph?
She would ideally choose point A, as this is a feasible point with the highest utility for her. At this point she keeps 140 pounds to herself and gives the other indivudal 60 pounds.
61
# 4.7 Social preferences: Altruism
Given that 200 pounds is Zoe's feasible set, how much will she keep and how much will she give away with self interested preferences on this graph?
She keeps all 200 pound for herself, as this gives her highest utility.
61
# 4.7 Social preferences: Altruism
Using this game (example of a prisoners), and given that Anil is self-interested what will he pick?
His dominant strategy will be T, irrespective of what Bala chooses, as picking this will give him higher utility.
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# 4.7 Social preferences: Altruism
Using this game (example of a prisoners), and given that Anil is altruistic towards Bala what will he pick?
His utility is dependent on both his and his opponents monetary pay off. Therefore as I,I provides them both with the hgihest utility he will pick this.
Altruism-leads to cooperative behaviour BUT dependent on Anils level of altruism to Bala the curves may have been steeper leading to a different decision.
63
# 4.7 Social preferences: Altruism
Given that in this game Anil is altruistic what are the two possible outcomes, dependent on Balas preferences?
If Bala is also altruistic -> also picks I, both end up with higher utility than by if they both pick T
If Bala is self interested -> picks T, Anil bears cost, while Bala is better off
64
# 4.8 Repeated interaction
Why are one-shot games usually not representative of decision making in life?
Ongoign relationships, where a reputation of opponents in established is an important feature to social interaction.
65
# 4.8 Repeated interaction
In repeated games what is used to make informed decisions about long term goals?
Income can be maximised my considering the past decisions of opponents.
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# 4.8 Repeated interaction
What can repeated games involving a shared pool of public goods show individuals?
Identifies those who are self interested and free riders. Experiments have found that even seemingly altruistic players care more about the behaviour of others and will change behaviour accordingly.
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# 4.8 Repeated interaction
In repeated games, what is the most likely reason that those who intially contributed highly did not continue to after others had not?
A lack of reciprocity, suggested that the social norm was not followed. This led to these players being dissapointed and lowering their own contributions.
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# 4.8 Repeated interaction
In repeated games, what may occur if punishment to free riders is introduced?
In practice this often yields higher levels of contribution
69
# 4.9 Using experiments to study economic behaviour
Why is it important to use experiments alongside economic models?
Models based purely on self-interest and one-shot interactions (like basic game-theoretic models) often fail to predict real human behaviour.
Many experimental results deviate from the narrow self-interest assumption. Instead, people often act cooperatively, fairly, or reciprocally.
* For example, in public-good games — where theory predicts free-riding — many participants nevertheless contribute; cooperation emerges, especially under repeated interaction or when there is a possibility of punishment for free-riders.
70
# 4.10 Cooperation, negotiation, and conflicts of interest
What can lead to cooperative behaviour?
1. Altruistic social preference
2. Social norms dictating behaviour
3. Repeated interaction leading to rewrd, reciprocation and punishment
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# 4.10 Cooperation, negotiation, and conflicts of interest
What is a conflict of interest? How is this involved in bargaining and social norms/preferences?
An issue that arises when one party gains more by the other one's loss. This is often involved with bargaining between parties where social nroms and preferences can be employed to navigate this.
72
# 4.10 Cooperation, negotiation, and conflicts of interest
Are norms always going to dictate the same behavuour amongst all individuals?
NO, norms are often indicative of behaviour but some people will conform more than others. Similarly, some people will act more selfishly, and some act more generously. Norms are a starting point but an individuals preferences are also important to consider.
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# 4.11 The ultimatum game
Define economic rent
Economic rent is the difference between the net benefit (monetary or otherwise) that an individual receives from a chosen action, and the net benefit from the next best alternative (or reservation option)
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# 4.11 The ultimatum game
Define the ultimatum game
A game in which the first player proposes a division of a ‘pie’ with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing.
75
# 4.11 The ultimatum game
Why is real money used in the ultimatum game?
This provides substantial value to the players, therefore their actions are more representative of the real world.
76
# 4.11 The ultimatum game
Describe the rules of the ultimatum game?
1. The Proposer is provisionally given $100.
2. The Proposer decides how much money (x) to offer to the Responder; (x) can be anything from 0 to $100.
3. The Responder can either accept or reject the offer.
THEN:
If the offer is rejected, both players get nothing.
Otherwise, the Responder receives y and the Proposer gets 100 – y
77
# 4.11 The ultimatum game
Define the options of accepting or rejecting the offer in the ultimatum game in economic terms
Accepting the offer: Economic rent gained
Rejecting the offer: Considered as the next best alternative to get nothing
78
# 4.11 The ultimatum game
What is a large difference about the process of games like the prisoners dilemma compared to the ultimatum game?
The prisoners dilemma is a simultaneous game. The ultimatum game is a sequential game.
79
# 4.11 The ultimatum game
How would a responder with entirely self interested preferences respond to any offer in the ultimatum game?
They would accept any offer as anything is better than nothing.
80
# 4.11 The ultimatum game
Why is it that many proposers in the ultimatum game will not offer an extremely low value?
They may value fairness, or anticipate that the responder will value it, leading them to pick the minimum acceptable offer.
81
# 4.11 The ultimatum game
Define minimum acceptable offer
In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. More generally in bargaining situations, it is the least favourable offer that would be accepted.
82
# 4.11 The ultimatum game
Define homo economicus
Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own self-interest.
83
# 4.12 Experimental results of the ultimatum game
What does this graph suggest about self interest?
Many responders in this study were not just motivated by self interest.
84
# 4.12 Experimental results of the ultimatum game
How could Proposers use the data from experiments of the ultimatum game?
This would inform them about social norms and preferences, helping to dictate how they make their decisions. This would help determine what offers Responders would accept and reject, establishing the minimum acceptable offer
85
# 4.12 Experimental results of the ultimatum game
How do you calculate expected pay offers for the following?
Multiply the probably of acceptance with the pay off if accepted
86
# 4.12 Experimental results of the ultimatum game
When competition with another responder is introduced in the ultimatum game what does the behaviour of responders resemble?
Similar to the behaviour of self-interested individuals, who are only concerned about money.
87
# 4.12 Experimental results of the ultimatum game
Why is it that in an ultimatum game involving a second responder, both individuals are more likely to accept an offer?
If one responder accepts, while the other rejects, the one that rejects get a zero pay off. Therefore, rejecting has a smaller impact on the proposer. A reponder who cares about fairness cannot rely on the other responder to reject a low offer as they may not share their values.
88
# 4.12 Experimental results of the ultimatum game
In an ultimatum game involving two responders, what does this do the proposers position?
Their position is strengthened as they know they can offer lower proportions.
89
# 4.13 Coordination games and conflicts of interest
What is/are the Nash equilibrium/s in this game?
(Cassava,Rice) and (Rice,Cassava)
90
# 4.13 Coordination games and conflicts of interest
What type of game is this?
A coordination game: A game in which there are two Nash Equilbriums, one may be more pareto efficient than the other.
91
# 4.13 Coordination games and conflicts of interest
Can we assume which division of labour Bala and Anil would take in this game?
No, the decisions are still taken independently without communication. Players may pick an equilibrium in which they are worse off.
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# 4.13 Coordination games and conflicts of interest
When does a conflict of interest occur in a coordination game?
When the players would prefer opposite Nash Equilibriums.
93
# 4.13 Coordination games and conflicts of interest
What is/are the Nash equilibrium(s) in this?
(Java,Java) and (C++,C++)
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# 4.14 Modelling the global climate change problem
Describe the Hawk-Dove model
“Hawk–Dove” — coordination with conflict of interest: Both want emissions restricted (to avoid catastrophic climate change), but each prefers that the other country bears the cost. So each prefers to “wait” while the other acts. This tends to lead to inaction.****
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# 4.14 Modelling the global climate change problem
What are policies to make the restrict,restrict policy nash equilibrium?
Sustainable consumer lifestyles: People could come to prefer lifestyles that use fewer goods and services. Restrict becomes less costly.
Governments could stimulate innovation and the diffusion of cleaner technologies
A change in norms: Citizens, non-governmental organizations (NGOs), and governments can promote a norm of climate protection and sanction or shame countries that do nothing to limit climate change.
Countries can share the costs of Restrict more evenly: This is possible if, for example, a country for whom Restrict is prohibitively expensive instead helps another country where it is less expensive to Restrict.
EC1002
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