in Britain and replaced by steel imports from China, Britain counts that as a success. Between 1990 and 2005, Britains carbon production fell by about 15 percent but its carbon consumption rose by 19 percent, when imports were counted. The rest of Europe has been deindustrializing too, and this has also encouraged energy-intensive production to move overseas. Let us analyze the carbons consumption in Britain using game theory, assuming that the Kyoto Protocol not only penalizes coal production but also coal consumption. Britain and China have to decide whether to consume renewable (clean) or coal (dirty) energy. However, Britain signed the Kyoto protocol in 1997 and,
hence, its coal consumption makes more di¢ cult to achieve the reduction in CO2 emissions. Assume that Coals consumption generates a negative cost to Britain equal to -15 million when it is the only country consuming it, however, if China also consumes coal this negative cost triples. The cost of consuming coal in China is zero when it is the only country using coal, since China did not signed the Kyoto protocol; however, this cost becomes a bene t equal to 5 million when both countries consume coal given that Britain imports coal from China. If both countries move away from dirty energy, Britain enjoys an environmental bene t equal to 28 million and Chinas environmental bene t is half Britains bene t. However, if only one country consumes renewable energy Britains bene ts decrease to 10 million and Chinas bene ts are 14.
1. Draw the normal form game and identify the countriespayoffs. (3 Points)
2. What is the Nash equilibrium of the normal form game? (3 Points)
3. Draw the extensive form of the game and identify the countriespayoffs. Assume that Britain is the first mover of this game. (4 Points)
4. What is the Nash equilibrium of the extensive form game? (3 Points)
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