Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are uncertain about whether to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than by cooperating with you.
-Refer to the scenario above.Which of the following is true?

Question

Quizplus · Accepted Answer

The equilibrium outcome in this case is socially inefficient because the mechanic has a dominant strategy to defect (not do an honest job) and gain $500, leading to a suboptimal outcome for both parties. Trusting the mechanic is risky and there are no guarantees of a good outcome, leading to potential market failure.

Scenario: Your Car Broke Down While You Were Driving to the Office