game theory

Game theory- use

Where an individual needs to figure out a social environment/delimna

Invisible hand

The idea that when individuals act with self interest in a free market this causes a socially optimal outcome

Externalities

Side effects of action taken that affect 3rd parties

Positive externality

When an economic activity creates benefits for 3rd parties

Negative externality

When an economic activity creates a negative affect on 3rd parties

E.g: pollution

Tragedy of commons

where resources not owned by anyone is shared

Free riding

When an individual benefits from the use of a good or service without paying for it or absorbing any costs

Example of free riding

Watching a firework display without paying taxes

Players

People/options involved in the interaction

Payoff matrix

A table of payoffs with every possible combinations of stratergies chosen by the players in the game

Dominant stratergy

The option that creates the highest playoff for a player no matter what the other player chooses

Dominant stratergy equilibrium

An outcome of a game where both players choose their dominant stratergy

Social preference examples

Families

Collective action

Wage setting

Tax compliance

Inequality aversion

Nash equilibrium

each players strategy is the best response considering what others are doing

Altruism

a willingness to help someone else at a cost to yourself

Pareto efficiency

When you can’t make someone better off without making someone else worse off

Economic rationality

States you should always accept the offer because something is better than nothing