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is game theory a theory? what are its assumptions?
no, it’s an analytical tool and method.
assumes that individuals are rational and act strategically.
Define social dilemmas:
a situation in which actions are taken independantly by self-interested individuals resulting in a socially suboptimal outcome.
What is the Public goods social dilemma?
public goods → non excludable
free riding= benefitting from contributions of others to some cooperative project without contributing oneself.
solution= public provision and payment (taxes)
Tragedy of commons:
common pool ressources=
problem= overexploitation, free riding.
Coordinating economic actors:
strikes
How do we solve social dilemmas? Mecanism?
1) social preferences.
2) private institutions
3) Public policies & institutions.
What are the key concepts of game theory?
social interaction
strategic interaction
strategy
What are the common demonitiors of any games?
players
feaible strategies
information
payoffs
What is the invisible hand?
actors maximise benefits without any real strategy.
go for relative gains rather than absolute.
pursuite of self interest in economics can lead to socially desirable outcomes.
What are the problems with the invisible hand?
Sometimes following self-interest can lead to:
sub-optimal outcomes (underperformance)
really bad outcomes
negative externalities
What does the prisoner’s dilemma show?
individual incentives often make cooperation difficult.
selfish behaviour can lead to suboptimal outcomes.
What is the nash equilibria?
= stable outcome, no incentive to go anywhere else.