Answer Happy

Emerging economy Renewable energy Developed Renewable energy (10,10) (4,12) economy Oil and coal (12,4) (6,6) Figure 13 Payoff matrix for energy sources ($US billion) In a world comprising two economies, each has to choose whether to use renewable energy in its production processes or use traditional fuels, such as oil and coal. The traditional fuels are cheaper and so keep down production costs for individual firms. However, their use is associated with the increasing incidence of extreme weather events causing devastating and costly natural disasters across the world. The choices the two economies face may be set out as an economic game with the payoff matrix shown in Figure 13. Assume an international agency now imposes a fine of $1 billion that reduces the payoff to economies that choose oil and coal. Find the equilibrium for this revised game. What is the payoff to the emerging economy at this equilibrium? $ billion Oil and coal