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Consider the case of global environmental problems that spill across international borders as a prisoner鈥檚 dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can choose whether to protect the environment, at a cost of $10$, or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of $16$, but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of $32$, which is divided equally between the two countries.

a. In Table $12.10$, fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.

Step by step solution

01

Monopolistic Competition :

It's characterized as a form of imperfect competition in which a large number of companies sell items that differ from one another and hence aren't ideal alternatives.

02

Explanation : 

The explanation for country B's action is that if country A protects the environment, the benefit will be $6$if we act to preserve the environment, but $8$if we do not, thus we will not protect the environment.

As a result, both nations will opt not to protect, despite the fact that if they both choose to protect, they will reap the large societal advantages (a combined benefit of $12$for both countries). Treaties on the environment might be considered as a mechanism for countries to try to get out of this dilemma.

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