The Nash equilibrium helps economists understand how decisions that are good for the individual can be terrible for the group. This tragedy of the commons explains why we overfish the seas, and why we emit too much carbon into the atmosphere. Everyone would be better off if only we could agree to show some restraint. But given what everyone else is doing, fishing or gas-guzzling makes individual sense. As well as explaining doom and gloom, it also helps policymakers come up with solutions to tricky problems. Armed with the Nash equilibrium, economics geeks claim to have raised billions for the public purse. In 2000 the British government used their help to design a special auction that sold off its 3G mobile-telecoms operating licences for a cool £22.5 billion ($35.4 billion). Their trick was to treat the auction as a game, and tweak the rules so that the best strategy for bidders was to make bullish bids (the winning bidders were less than pleased with the outcome).
Monday, September 12, 2016
The Economist Magazine is devoting space to explaining some fundamental economic ideas. Their third topic is Nash Equilibrium: