Question

A company (C) can choose to use a currently legal but contaminating technology (USE) or not (NOT). The government (G) prefers that the company does not use this technology (the government's approval rating is highest this way). Nonetheless, if the company does use it, the government prefers to let it go (OK if USE) rather than allocating resources to make the technology illegal (FIGHT if USE), which would result in a further loss of approval rating. The profits for the company ( Π ) and the approval ratings for the government (AR ) can be soen in the following game tree: (a) What is the equilibrium path associated with the SPNE of this game? What is the outcome? (b) Analize the validity of this statement: "the government can make the company not use the technology by threatening them to fight if they use it."

Answer 1

In this game, the company can choose to use a contaminating technology or not. The government prefers that the company does not use the technology. The equilibrium path is for the company to choose not to use the technology, and the government cannot make the company not use the technology by threatening to fight.

Step-by-step explanation:

In this game, the company (C) can choose to either use the contaminating technology (USE) or not use it (NOT). The government (G) prefers that the company does not use the technology. If the company chooses to use it, the government prefers to let it go rather than allocating resources to fight against it. The game tree shows the profits for the company (Π) and the approval ratings for the government (AR).

1. (a) The equilibrium path associated with the SPNE (Subgame Perfect Nash Equilibrium) of this game is for the company to choose NOT to use the technology. This results in the highest outcome in terms of government approval ratings and profits for the company.
2. (b) The statement that the government can make the company not use the technology by threatening to fight if they use it is not valid. The government prefers to let it go if the company chooses to use the technology, rather than allocating resources to fight against it. Therefore, the threat of fighting would not deter the company from using the technology.