Environmental Engineering Reference
In-Depth Information
arise commonly for natural resources. If two people share a pond, both have an in-
centive to take fish, while hoping the other doesn't. For a restoration project that has
the potential to benefit many but will be costly and require effort to maintain, incen-
tives might encourage individuals to try to free ride on the effort of others.
Cooperative game theory solutions rely upon the ability of parties to communi-
cate, make binding agreements and, in some cases, conduct transactions such as mak-
ing side payments or trading valuable resources. The most basic solution concept, the
Nash bargaining solution, involves finding an outcome (set of individual decisions)
for which all parties are better off than they would be without cooperating (Nash
1950). While this sounds obvious, oftentimes there are winners and losers, and if los-
ers are not compensated or provided for, they will opt out.
An example based on general hypothetical common units of benefit is shown in
table 17.1. With no cooperation, the net benefits would be those in the first line, un-
der the noncooperative Nash equilibrium. A more socially optimal solution with
greater net benefits is identifiable, however (row 2). To achieve it, no one can have an
incentive to opt out, so both parties must be better off. The net gains from cooperation
(70 - 60 = 10), rather than the gross payoff, are shared equally for the Nash bargaining
solution (row 3). The counterfactual, the state of the world that would occur without
agreement, is the reference point from which to measure and distribute cooperative
benefits. Typically, the counterfactual is the noncooperative Nash equilibrium.
A key insight of the Nash bargaining solution is that a stable cooperative agree-
ment does not mean a uniform distribution of net benefits, but a uniform distribution
of net benefits relative to what would occur without cooperation (in general the Nash
equilibrium). So a party who would do very well under the noncooperative outcome
must first be made as well off before net benefits can be distributed. While some
might not see this as fair, it shows the importance of respecting individual incentives
for social goals.
For example, imagine a scenario where a stakeholder is concerned that predators
will take livestock and, therefore, wants to use fences and traps to prevent this. A res-
toration group might make a binding agreement to compensate for any losses in ex-
change for the stakeholder agreeing not to take these measures. The restoration group
now has added costs, and might help maintain a land use that is not necessarily the
most ecologically desirable, but is a better option than being without the agreement
and without large predators in the landscape.
TABLE 17.1
Example of a Nash equilibrium (row 1), a net socially superior possible outcome (row 2), and a
cooperative distribution via the Nash bargaining solution to achieve net gains (row 3).
Scenario
Party A net benefit
Party B net benefit
Total net benefits
1. Nash equilibrium
20
40
60
2. Social optimum (greatest
sum net benefits)
35
35
70
3. Nash bargaining solution
25
45
70
