Question

If governments make trade policies based on national economic​ welfare, is the problem of trade warfare still represented by a​ "Prisoner's dilemma"​ game? What is the equilibrium solution to the game if governments formulate policy in this​ way? Would they ever choose the strategy of​ protectionism?

Answer 1

Answer:

Reducing trade barriers

Explanation:

If governments choose protectionism, they harm citizens who could benefit from the products, services or jobs offered by foreign companies.

If, for example, the “A” government sets tariffs to protect the domestic market, the “B” government could respond with tariffs in retaliation, which would result in both countries being harmed. So, the problem of trade warfare is still represented by a “Prisoner's Dilemma” game because it says that two people, in this case, two governments, can decide not to cooperate even if it goes against the interest of both.

On the other hand, unrestricted free trade could go against governments that develop trade policies based on national economic well-being.

The game's equilibrium solution would be for both countries to opt to reduce their trade barriers through negotiations.