Scenario: Two factories dump their waste in a river. This has led to the contamination of the water, which is also used by the factories in their production processes. The matrix below shows the profits of the two firms based on their respective decisions to dump their waste in the river. Note that each firm's choice affects the other firm's profit. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

-Refer to the scenario above.What is the equilibrium outcome in this case?
A) Both firms will dump their waste into the river.
B) Neither of the firms will dump its waste into the river.
C) Firm 1 will dump its waste into the river, and Firm 2 will not dump its waste.
D) Firm 2 will dump its waste into the river, and Firm 1 will not dump its waste.

Question

Scenario: Two factories dump their waste in a river. This has led to the contamination of the water, which is also used by the factories in their production processes. The matrix below shows the profits of the two firms based on their respective decisions to dump their waste in the river. Note that each firm's choice affects the other firm's profit. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.
 
-Refer to the scenario above.What is the equilibrium outcome in this case?
A) Both firms will dump their waste into the river. 
B) Neither of the firms will dump its waste into the river. 
C) Firm 1 will dump its waste into the river, and Firm 2 will not dump its waste. 
D) Firm 2 will dump its waste into the river, and Firm 1 will not dump its waste.

Quizplus · Accepted Answer

Without the specific details of the scenario, the general principle of game theory suggests that in a situation where firms face a choice between dumping waste into a river (which might be the cheaper option) and not dumping (which might be more costly or require investment in waste management), the equilibrium outcome, in the absence of regulation or cooperation, often leads to both firms choosing the option that minimizes their costs, even if it's environmentally harmful. This is known as the "tragedy of the commons," where individual rational choices lead to a collectively irrational outcome, assuming the firms act in their self-interest without coordination or regulation to prevent pollution.

Scenario: Two Factories Dump Their Waste in a River