2.2 Game theory: prisoners' dilemma
Suppose you have become convinced that long-distance flights are having a significant impact on global warming, but that you get a lot of pleasure from holidays in the Far East. If you could be sure that global warming would be substantially reduced if you personally stopped flying, you would willingly pay that price. But in fact you also know that your own contribution to global warming is a very small part of the total; if you alone stop flying, then there will be no observable impact on global warming, while if everyone else stops taking long-distance holidays global warming will be reduced even if you carry on. We may show this situation in the form of a matrix, as follows:
| Stop flying | Carry on flying | |
| Everyone else's strategies | Second best | Third best |
| Your strategy | Worst | Best |
The words in italics show the rank order of your personal ‘payoffs’ from different strategies, given the reactions of other people. You will see that your optimum strategy is to carry on flying, regardless of what others decide. For, if they stop, you will gain from a reduction in global warming even if you carry on, and in the latter case you will still be able to enjoy your holiday: ‘best’ is better than ‘second best’. Similarly, if they don't stop flying either, then you will suffer from the effects of global warming, but at least you too will have been able to get away on holiday; ‘third best’ is better than ‘worst’. In the language of game theory, the strategy ‘carry on’ dominates the strategy ‘stop’. It seems logical to assume that everyone else will have made the same calculation, and thus everyone else will adopt the ‘carry on’ strategy.
This allows us to predict that everyone will end up in their own third-best boxes, even if we were all agreed that it would be better for us personally if we were all in the second-best box. The structure of the payoffs implies that a purely voluntary system of paying for a public good such as climate stability will not achieve that end; in general, where public goods are concerned, a free market system cannot work and some form of collective compulsion is required.
This is a very simplified introduction to prisoners' dilemma. For more details, including some discussion of the evidence of its practical relevance, you can consult Wikipedia.
Activity 2
You may wish to consider these questions:
Economists are often accused of overemphasising the role of self-interest in human affairs. If we assumed that people were prepared to act altruistically, how much difference, if any, might it make to the public goods argument?
If we apply the prisoners' dilemma argument to treaties between nations rather than the decisions of private individuals, does it make the problem of global warming easier or harder to resolve?
The implication of seeing climate stability as a ‘public good’ problem is that coercive government action may have to replace voluntaristic market mechanisms in order to solve it. What limits on effective government action are likely to be encountered?
Can you think of ways in which governments might try to use market incentives in trying to solve the problem of climate change?
2 Competing goods?