Question 2. (8 marks) In this question we will examine the conditions under which an external authority can use penalties to induce firms to co-operate in their common resource property use (ie, can regulate the industry). Firm 2 Co-operate Deviate 6, 24 Co-operate 20, 20 Firm 1 Deviate 24, 6 9,9 Each entry in the cell lists the payoffs (firm 1, Myarm 2) for the firms arising from the pair of actions. (3 marks) Find the Nash Equilibrium of the game. ii) (2 marks) Explain why the Nash Equilibrium in i) involves a social dilemma that reflects the decision environment. Suppose an external authority can be organized at a cost of x units of payoff. This cost must be paid regardless of the outcome of the game. However, the cost is shared when the two firms choose the same action, (Co-operate, Co-operate) or (Deviate, Deviate), but is paid only by the deviating firm if they choose different actions. iii) (3 marks) For what values of the cost x, will the existence of the external authority resolve the social dilemma in the original game? That is, make (Co-operate, Co- operate) a Nash Equilibrium