South-Western College Publishing - Economics  
Society Would Be Better Off if Everyone Played Cooperatively and Got a Flu Shot
Topic Oligopoly
Key Words Game theory, prisoner's dilemma, Nash equilibrium, social optimum, private optimum.
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Reference ID: A160597418

News Story Adam Smith argued in the Wealth of Nations that individuals, acting in their own best interests, would meet the needs of society. So why doesn't that apply to people getting vaccinated?

John Nash explained this with his theory of non-cooperative behavior. His Nash equilibrium, as it is now called, suggests that people's strategies can be in equilibrium without being at the optimum point.

Take vaccinations, for example. A group of researchers at Yale studied perceptions toward vaccinations, and discovered that those aged 65 and over were far more likely to have received the influenza vaccine than those younger. This makes sense, since seniors are more likely to die from influenza than those younger. It's in their best interests to receive the vaccine. But children, who receive the illness, and spread it around their homes, and whose parents then spread it around the workplace, are far less likely to be vaccinated. Why? Because children are far less likely to die from influenza. Again, it's a rational thing to do.

But researchers find over and over again that a critical mass exists with vaccination. If enough people can be vaccinated against a given illness, there aren't enough people to infect, and the illness dies out. In fact, if 77% of young people were vaccinated against influenza, seasonal influenza would be wiped out. Why doesn't this happen? Because individuals don't necessarily think about what's best for society; they think about what's in their best interest. They don't get vaccinated because it's good for society; they get vaccinated because it's good for themselves. What's more, it would require a concerted effort to vaccinate enough people to achieve a critical mass, necessitating the intervention of some central agency to administer the vaccines.

Is the social best ever equal to the individual best outcome? Yes, in the case of a pandemic, in which many more people are likely to die as a result. Many more people will be vaccinated, moving society closer to the critical mass required to wipe out the illness.

Questions
Discussion Questions:
1. Why don't individuals move in a non-cooperative game from an individual optimum to the social optimum?
2. Suppose an instructor in a class grades on a curve (i.e., 10% receive an A, 20% a B, and so on). Can cheating by students on an exam be considered a Nash equilibrium in that situation? Why or why not?
3. Consider the vaccination example. Is there a way to move individuals to the cooperative outcome, in which a critical mass of people receive vaccinations? How could this occur?
Multiple Choice/True False Questions:
1. What economic concept best explains the reason for the difference between the socially optimal number of people vaccinated, and the individually optimal number?
  1. External benefits
  2. Sunk costs
  3. Opportunity costs
  4. Long-run variable costs
2. True/False. In a Nash equilibrium, a superior alternative exists, but no individual has a reason to move in that direction.
3. Consider the following scenario. Two companies are deciding on price of its product. If each company charges $30, each firm will earn $10 million in profit. If each company charges $40, each firm will earn $20 million in profit. However, if one firm charges $40, while the other charges $30, the lower-priced firm will earn $45 million in profit, while the higher-priced firm will only earn $15 million. What is the Nash equilibrium price in this scenario?
  1. Both charge $30
  2. Both charge $40
  3. One charges $30, the other charges $40
  4. None of the above.
Source "Pricking Consciences." The Economist. March 15, 2007.
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