Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
-Refer to Scenario 13.9. If this game is repeated over an infinite or uncertain horizon, the most likely observed behavior will be that:
A) both firms pollute.
B) only Lago pollutes.
C) only Nessie pollutes.
D) neither firm pollutes.
E) the firms alternate polluting in different periods.

Question

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms. 
-Refer to Scenario 13.9. If this game is repeated over an infinite or uncertain horizon, the most likely observed behavior will be that:
A) both firms pollute. 
B) only Lago pollutes. 
C) only Nessie pollutes. 
D) neither firm pollutes. 
E) the firms alternate polluting in different periods.

Quizplus · Accepted Answer

In a repeated game with an indefinite or uncertain time horizon, the firms have the incentive to cooperate and not pollute in order to avoid the costly consequences of a polluted lake. In this case, both firms can achieve their best outcomes by not polluting, as it avoids the additional cost of dealing with polluted water. Over time, reputation effects and the possibility of future punishment can further incentivize cooperation. Therefore, it is most likely that neither firm will pollute in the long run.

Scenario 13.9 Consider the Following Game