Game theory is a description of a social interaction, which specifies the players,

the feasible strategies, the information and the payoffs. It shows the predicted
outcome or the best response that includes the highest payoff. Game theory can
prove to be an essential tool to analyse why people are increasingly reluctant to
smoke, in the UK.
Below are two persons whom we shall call person A and person B. They take
decisions about whether or not are they going to smoke, given the action taken
by the other person. We shall also introduce some concepts like private benefit
and private cost to cigarette smoking.
Private benefit refers to the benefits that are directly accrued to the individual
who is undertaking an economic activity, while private cost refers to the cost
faced by the decision makers who are directly involved in the consumption of the
good. In this context, we can argue that the private benefit is in terms of the
relaxation that the smoker receives when he smokes a cigarette while his private
cost includes the price he has to pay for a cigarette.

Assume that both person A and person B get a net benefit of 10 if they smoke
(private benefit-private cost) and if one of them does not smoke but the other
person does smoke, the the initial person bears an external cost of 10.

Person A
Smokes

Nash equilibrium,
but not a socially
desirable outcome

Smo
ke
Person B

Does
not
smoke

10
10

Does
10
not
smok
-10
e

-10

10
0
0

New
equilibrium
when each one
takes into
consideration
external costs

What is Person Bs best response to Persons A hypothetical decision to smoke?

It is to smoke (he gets 10 net benefit in this case, rather than -10 were he were
to choose not to smoke).
What is persons A best response be to Person B hypothetical choice of smoking?
Person A would again Smoke.
So whatever Person A does, the best response for Person B is to smoke.

This means that smoke is the dominant strategy and, because smoke is the
dominant strategy for both, both smoking is the dominant strategy equilibrium.
The prediction of the game is that both will smoke. Both would be better off had
they both not smoked. So the predicted outcome is not the best that is feasible.
However this has been changing in past years. Though, A and B are not at their
best feasible outcome now, they can get to it they take into consideration the
three following factors:
1. If smokers start internalising the external costs of smoking, that is, they
incorporate the external costs of smoking in their decision, then net
benefit would fall drastically, thus resulting in a fall in number of smokers.
2. Institutions and legislations can ban public smoking thus reducing the
number of smoking.
3. People can reach on agreements where they can simply agree upon not
smoking.

If person A cared about person B, that is, had A incorporated the external
cost of smoking imposed on B, then person A would lower his consumption
of cigarette. Person A is willing to bear the external cost in order to help
person B. This means that person A has altruistic preferences. If person A
had incorporated his external cost (-10), then his net benefit from
cigarette smoking would be zero, which means he is less likely to smoke.
Upon seeing this, person B would be encouraged to reduce his
consumption of cigarette (repeated games) such that they would reach a
new Nash equilibrium which is (0, 0), which is a more desirable outcome.

Moreover, the socially undesirable outcome was due to lack of punishment

and there was no way to make the smoker pay for the damage caused.
But, with the right institutions, laws, fines and taxes, it is now possible to
punish smokers. For instance, on 1 July 2007, the smoking ban imposed in
all public places and enclosed workplaces reduced the number of smokers
as they could now be punished through fines if they trespassed laws. This
reduced the willingness to smoke as no one would want to be ostracised in
a social milieu where the majority is non-smokers.

Conclusively, it can be said that the game theory (actions taken by others)
does influence our decision to smoke. As long as people continue to have
altruistic preferences and as long as laws are correctly enforced to punish
trespassers, the willingness to smoke will continue to fall to reach a
socially desirable outcome.

Climate change is one of the biggest humanitarian crisis of our times and
it demands an international cooperation to reduce its impact, if not
eradicate it. Again, in this context, game theory can be used to assess
whether are there enough reasons for countries to cooperate and abate or
continue to pollute.

Abating pollution can be seen as a public good since neighbouring

countries cannot be excluded from enjoying the benefit of reduced
pollution, nor can anyone reduce the benefit enjoyed by the other
countries. Hence, because of the two characteristics of non-excludability
and non-rivalry, this gives rise to free riders, that is, some countries will
attempt to get a free ride on the back of other countries abatement
programmes.

Equilibrium
when treaty is
adopted and
followed

Equilibrium
by
self-interested
countries

From the table above, we can see that when both countries abate, they
both benefit from (6,6). The total payoff when both countries abate is 12.

However, this is not a Nash equilibrium as there is always an incentive for

any country to move away the (6,6) payoff as the individual payoff when
one country abates and one country pollutes is always higher for the
polluting country. Hence, countries left to their own devices, will prefer to
continue pollute as the governments prefer to maximise growth (policy
myopia) which comes at the expense of the environment. The Nash
equilibrium here, though not the most desirable, is (0,0).

This can also be shown in the above diagram where the country R always
benefits when it does not contribute. Hence the future of our planet seems
bleak in response to climate change.

But luckily enough, countries have started to realise the destruction that
climate change is causing. Treaties, like the Kyoto and Montreal protocols,
are being signed and agreed upon which is leading to the socially
desirable Nash equilibrium (6,6) as shown in the above diagram.

Trust and cooperation between countries are extremely important in

ensuring abatement programmes. If trust is reciprocated by countries,
then cooperation is sustained and everyone benefits in the end.
Punishment also forms part in ensuring that countries do not free ride on
others abatement programmes. Economic sanctions, for instance, can be
imposed on countries not respecting the treaty.

The prospects for cooperation to reduce the impact of climate change are
here. Countries just need to be willing enough to enforce them.