Chapter 4: Nash equilibrium and public policy
The best-known ideas in game theory are within noncooperative game theory, and probably the single best-known example in game theory is the Prisoner’s Dilemma, a noncooperative example. This example shows how interactive self-interested decisions may lead to results that are less favorable to all participants than some other outcome would be. The Prisoner’s Dilemma example can be generalized to a class of noncooperative normal form games known as “social dilemmas” (Dawes, 1980) that share similar broad qualities. From the pragmatic point of view, noncooperative game theory provides powerful tools for the identification and specification of problems, as the social dilemmas exemplify. On the whole, moreover, noncooperative game theory is a relatively settled, mature study. Social dilemmas are a class of Nash equilibrium models, and Nash equilibria are well understood and the foundation of most applications of noncooperative game theory. However, there are some unsettled issues and some other proposed approaches to the solution of noncooperative games. This chapter will review a number of Nash equilibrium models with a view to their applicability to public policy studies.
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