ECON1020 – PRINCIPLES OF ECONOMICS 1 ASSIGNMENT

PART A: GAME THEORY AND CLIMATE CHANGE

In March 2023 the Intergovernmental Panel on Climate Change (IPCC) released its Synthesis Report, capping off seven years of in-depth assessments on various climate-related topics.

The authors of the report concluded:

• It was now "unequivocal" that climate is changing as a result of human activity, and that it is a threat to human societies and the natural world.
• Climate change is already making extreme weather events more frequent — with 3.3 to 6 billion people living in places “highly vulnerable” to these changes.
• Cuts to emissions need to be "deep, rapid and sustained" if the world is to limit warming to 5 degrees Celsius this decade.
• If warming goes above that, adaptation will likely be too much for some communities and ecosystems to 

In response to the report’s findings the United Nations Secretary-General, António Guterres, called for “all G20 members to come together in a joint effort, pooling their resources and scientific capacities as well as their proven and affordable technologies through the public and private sectors to make carbon neutrality a reality by 2050.”

We can model how two nations interact with regard to their climate policy using game theory. Let’s take two members of the G20, Argentina and France. Assume that each nation can choose from one of two possible climate strategies:

• Abate: governments enact policies to reduce carbon emissions, for example, by taxing fossil fuels or subsidising clean 
• Pollute: governments fail to enact policies to reduce carbon emissions. Businesses and individuals are free to continue to use fossil fuels and pursue their own self- 

The payoffs of this game are shown in Figure 1 below. All payoffs represent potential increases to the nation’s gross domestic product (GDP), measured in billions of USD.

Figure 1: Payoffs for the climate strategy game between Argentina and France.

Question 1

Looking at the game shown in Figure 1. Determine whether either nation has a dominant strategy. Briefly explain your answer and state the dominant strategy if it exists. [3 marks] [max words: 150]

Question 2

What is the Nash equilibrium of the game shown in Figure 1? Is this Nash equilibrium a prisoners’ dilemma? Why or why not? [3 marks] [max words: 150]

Question 3

Given the payoffs shown in Figure 1, do you think the wishes of the United Nations Secretary-General that G20 members come together in a joint effort to make carbon neutrality a reality is realistic? Why or why not? [2 marks] [max words: 100]

Question 4

Suppose there is a change in the payoffs, as shown in Figure 2. With these revised payoffs in mind, determine whether either nation has a dominant strategy. Briefly explain your answer and state the dominant strategy if it exists. [3 marks] [max words: 150]

Figure 2: The climate strategy game with revised payoffs.

Question 5

What is the Nash equilibrium of the game shown in Figure 2? Is this Nash equilibrium a prisoners’ dilemma? [2 marks] [max words: 100]

Question 6

Given the payoffs shown in Figure 2, do you think the wishes of the United Nations Secretary-General that G20 members come together in a joint effort to make carbon neutrality a reality is realistic? Why or why not? [2 marks] [max words: 100]

Question 7

Thinking only about the payoffs in Figures 1 and 2, briefly discuss the reasons for any similarities or differences in your answers to Questions 3 and 6. [2 marks] [max words: 100]

Using a diagram with France’s payoffs on the horizontal axis and Argentina’s payoffs on the vertical axis, plot each of the possible outcomes shown in Figure 2. Be sure to label your diagram and provide a key to each of the possible outcomes. (Hint: see Figure 5.1 in your textbook for inspiration). [3 marks]

Question 9

Using the diagram you created for Question 8, show which, if any, of the allocations are Pareto efficient. [2 marks]

Question 10

Briefly discuss a possible drawback of using the Pareto criterion to evaluate the outcomes of the climate strategy game shown in Figure 2. [3 marks] [max words: 150]

PART B: POWER IN ECONOMIC INTERACTIONS

You are now asked to model the relationship between free time and production for a rice farmer named Diya who is being coerced by a landowner named Avery. Avery does not farm and can force Diya to work for them. To survive, Diya must do what Avery says.

If Diya was able to work 24 hours a day, they could produce 5 tonnes of rice each day. You are told that the allocation that maximises Avery’s economic rent occurs when Diya works for 10 hours a day, producing a total of 4 tonnes of rice each day. At this allocation, Diya gets 2 tonnes of rice each day to survive.

Question 11

Using a model of decision-making under scarcity, with free time on the horizontal axis and rice production on the vertical axis, show the allocation under coercion described above. On this diagram be sure to label the feasible frontier and biological survival constraint, along with the intercepts of each curve. [4 marks]

Question 12

Using the diagram you created for Question 11, show the technically feasible set that results from Avery’s coercion of Diya. What can we say about the slope of the feasible frontier and the biological survival constraint when Avery’s economic rent is being maximised? [2 marks]

Question 13

Evaluate the allocation under coercion based on a substantive judgement of fairness. Be sure to briefly define this type of judgement in your answer. [3 marks] [max words: 150]

Question 14

Evaluate the allocation under coercion based on a procedural judgement of fairness. Be sure to briefly define this type of judgement in your answer. [3 marks] [max words: 150]

Research has shown that land reforms that give farmers ownership of the land on which they farm can have long-standing positive impacts on livelihoods, food security, and the self-sufficiency of households.

Suppose that Diya now owns the land on which they farm and that Avery no longer has a claim on the land. You are told that Diya’s utility-maximising choice is to work for 9 hours and produce 3.5 tonnes of rice.

Using a model of decision-making under scarcity, with free time on the horizontal axis and rice production on the vertical axis, show Diya’s optimal choice of free time and production. On this diagram be sure to label the feasible frontier and indifference curve, along with the optimal choice. [3 marks]