In this unit, the tools of game theory are used to model social interactions in which the action taken by an individual affects not only the actor but other people as well. Unit 4 demonstrates how economics can help us understand complex, global issues – in this case climate change.
Unit 4 shows students how to use various types of games, and includes the concepts of best response, dominant strategy, and Nash equilibrium. The models show that decentralized coordination of social interactions sometimes works well – the invisible hand game – and sometimes not – the prisoners’ dilemma and public goods games. The unit also introduces the use of experiments in economics and shows how the results of these experiments (e.g. from the ultimatum game) often demonstrate preferences beyond self-interest, including altruism, reciprocity and inequality aversion.
While the unit maintains many of the games that were included in The Economy 1.0, the material has been reorganized to improve the flow of the unit. Pareto efficiency is now included in this unit (previously having been in Unit 5).
This is the header we’ve chosen for Unit 4.
It shows irrigated rice terrace fields in Yuanyang County, Yunnan Province, China. Climate change is used as a recurrent example to explain interactions and social dilemmas.
