Two countries share a polluted river and are trying to reach an agreement to abate pollution. Each country currently suffers damages of $1 billion from pollution. If one country acts to decrease pollution, it will have a total cost (C) of $4 billion (including current damages) and $5 billion of total benefits (B). The benefits are shared between both countries, so even if a country does not act, it can still benefit from its neighbor's abatement.

Each country decisions can be summarized as:

Act (Contribute):C = 4 (paid by country), B = 5 (divided between both countries) + benefit received from neighbor (if any)NB = 5/2 - 4 + benefit from neighbor (if any)

Not Act (Shirk):C = 1, B = benefit received from neighbor (if any)NB = -1 + benefit from neighbor (if any)

a)Fill the following matrix to show the payoffs of both countries in each scenario. In each case, the first number corresponds to the payoff of country A, while the second number is the payoff of country B.

Country B

Contribute

Shirk

Country A

Contr.

(,)

(,)

Shirk

(,)

(,)

b)Explain what a Nash Equilibrium is, in two sentences or less.

c)Find the Nash Equilibrium in the matrix above.

d)Is this equilibrium an example of the Tragedy of the Commons? Why?