Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 2

Consider the case of Jackson and Max, described in Section 8. 3. Suppose that installing a pollution control device costs $800. Suppose also that for each pollution-control device installed, both Jackson and Max will see their health care costs decrease by $600.
a. Recreate Figure 8. 1, incorporating the new information given in this problem. What is the equilibrium outcome in the game Jackson and Max are playing? What type of game did you construct?
b. Suppose that government offers Jackson and Max a subsidy for installing a pollution-control device. What is the minimum subsidy necessary to induce Jackson and Max to do so? Incorporate that subsidy into a new payoff matrix that reflects the changed incentives. What is the equilibrium in this new game?