UNIT 4 — COMPLETE STUDY NOTES · Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.13, 4.14, 4.15
Strategic Interactions
and Social Dilemmas
CORE Econ Microeconomics · Game Theory · Nash Equilibrium · Prisoners' Dilemma · Pareto Criterion · Public Good Games · Coordination Games ·
Climate Change
4.1 Climate Negotiations: Conflicts and Common Interests
Unit 4 uses game theory to model situations where each person's outcome depends on what others do. The motivating example is climate change — a
social dilemma where individual self-interest leads to a collectively harmful outcome.
Social Dilemma A situation where actions taken independently by self-interested individuals
produce an outcome inferior to what could have been achieved by acting
together.
Tragedy of the Over-exploitation of a shared resource because each individual captures the
Commons full benefit of using more while sharing the cost of depletion with everyone
else.
Common resources, each individual gets the same private benefit from using
more of it.
Free Rider Someone who benefits from others' contributions to a cooperative project
without contributing themselves.
,Real-World Examples of Social Dilemmas
● Climate change: each country benefits from cheap fossil-fuel energy but shares the cost of global warming with all
● Traffic congestion: each driver benefits from driving alone but contributes to gridlock for everyone
● Antibiotic resistance: each patient benefits from use but contributes to resistance that harms all
● Overfishing: each fishing boat benefits from large catches but depletes shared fish stocks
How Social Dilemmas Can Be Solved
• Government policy: taxes and regulations change pay-offs (e.g. landfill tax dramatically reduced UK waste dumping)
• International agreements: Montreal Protocol (ozone), Paris Agreement (climate) coordinate behaviour
• Social norms and altruism: caring about others internalises external effects — but insufficient at global scale
• Community institutions: local governance (e.g. Valencia water councils) can regulate common-pool resources
• Changing the rules: alter pay-offs or available strategies so cooperation becomes individually rational
, 4.2 Social Interactions: Game Theory
Game Theory A set of models for studying strategic interactions — situations where each
person's outcome depends not only on their own actions but also on what
others do.
Key Components of a Game
Component Definition Example (Rice–Cassava)
Players The decision-makers Anil and Bala (two farmers)
Strategies Actions available to each player Grow Rice or grow Cassava
Pay-offs Outcome (benefit) received for joint Income from selling crops at market
actions
Pay-off Matrix Table showing all players' pay-offs Figure 4.2 below
Simultaneous Both players choose at the same time without knowing the other's choice.
Game
Invisible Hand A game with a single Nash equilibrium that is also Pareto efficient —
Game self-interest guides players to the best outcome for all.
Strategic
•A strategy is defined as an action (or action plan) that a person may
interaction choose while aware of the mutual dependence of the outcomes on their
own and others’ actions.
Strategic Interactions
and Social Dilemmas
CORE Econ Microeconomics · Game Theory · Nash Equilibrium · Prisoners' Dilemma · Pareto Criterion · Public Good Games · Coordination Games ·
Climate Change
4.1 Climate Negotiations: Conflicts and Common Interests
Unit 4 uses game theory to model situations where each person's outcome depends on what others do. The motivating example is climate change — a
social dilemma where individual self-interest leads to a collectively harmful outcome.
Social Dilemma A situation where actions taken independently by self-interested individuals
produce an outcome inferior to what could have been achieved by acting
together.
Tragedy of the Over-exploitation of a shared resource because each individual captures the
Commons full benefit of using more while sharing the cost of depletion with everyone
else.
Common resources, each individual gets the same private benefit from using
more of it.
Free Rider Someone who benefits from others' contributions to a cooperative project
without contributing themselves.
,Real-World Examples of Social Dilemmas
● Climate change: each country benefits from cheap fossil-fuel energy but shares the cost of global warming with all
● Traffic congestion: each driver benefits from driving alone but contributes to gridlock for everyone
● Antibiotic resistance: each patient benefits from use but contributes to resistance that harms all
● Overfishing: each fishing boat benefits from large catches but depletes shared fish stocks
How Social Dilemmas Can Be Solved
• Government policy: taxes and regulations change pay-offs (e.g. landfill tax dramatically reduced UK waste dumping)
• International agreements: Montreal Protocol (ozone), Paris Agreement (climate) coordinate behaviour
• Social norms and altruism: caring about others internalises external effects — but insufficient at global scale
• Community institutions: local governance (e.g. Valencia water councils) can regulate common-pool resources
• Changing the rules: alter pay-offs or available strategies so cooperation becomes individually rational
, 4.2 Social Interactions: Game Theory
Game Theory A set of models for studying strategic interactions — situations where each
person's outcome depends not only on their own actions but also on what
others do.
Key Components of a Game
Component Definition Example (Rice–Cassava)
Players The decision-makers Anil and Bala (two farmers)
Strategies Actions available to each player Grow Rice or grow Cassava
Pay-offs Outcome (benefit) received for joint Income from selling crops at market
actions
Pay-off Matrix Table showing all players' pay-offs Figure 4.2 below
Simultaneous Both players choose at the same time without knowing the other's choice.
Game
Invisible Hand A game with a single Nash equilibrium that is also Pareto efficient —
Game self-interest guides players to the best outcome for all.
Strategic
•A strategy is defined as an action (or action plan) that a person may
interaction choose while aware of the mutual dependence of the outcomes on their
own and others’ actions.
