The Prisoner’s Dilemma: Effects in the Market and Economy

Sydney Swayzer

            Many aspects of human life involve making decisions and how those decisions affect others.  Economics is the social science about conditions of scarcity; the necessity of choices exists because of limited resources, but unlimited wants.  Every decision that we make has an opportunity cost (the next best alternative), and we choose whatever makes us better off. Charles Wheelan, the author of Naked Economics, notes about how this is the starting point of all economics:

            Economics starts with one very important assumption: Individuals act to make themselves as well of as possible. To use the jargon of the profession, individuals seek to maximize their own utility, which is a similar concept to happiness, only broader.[1]

            However, using the right incentives and making certain decisions sometimes makes us worse off instead. One common example is the prisoner’s dilemma. If neither Prisoner A or Prisoner B confess, both will be sentenced for 5 years. If they both confess, then they will receive a 25 sentence. If only one talks, then his partner will be sentenced for life while he receives three years.  Each prisoner will think that if he keeps his mouth shut, he could get a life sentence if his partner talks. Therefore, his confession makes logical sense because no matter what his partner does, he will still receive a sentence that is shorter than the risk of a life sentence. The lack of trust in each prisoner gets them both 25 years instead of the three years if both had just been quiet. Using the prisoner’s dilemma as an example, when does self-interest support and hurt the market and the economy?

            For supporting the economy, the competition of making oneself better off increases the demand in a market. Women wearing make-up is one example. Using make-up requires money, time, and effort, and every woman would be better off if nobody used it. However, one woman could use it to her advantage to look better than everyone else who’s not wearing any make-up. This competition sparks everyone to use it which increases the demand for make-up products giving more incentives to producers. The same can also be true for perfume, which has a perverse incentive of leading to health problems such as allergies and rashes.[2]

            Athletes using performance-enhancing drugs also boost the economy. Suspecting their competitors to be cheating, athletes mostly buy them from the black market.[3] The purpose of sales and purchases in the black market is to avoid taxes imposed by the government: either to buy certain goods at cheaper prices because of a price floor or to buy goods in short supply at higher prices.[4] So the demand for performance-enhancing drugs increases giving an incentive to produce more.

            Over-fishing works against the economy and fish market; fish are a public good since no one can monitor who uses it. Over fishing can cause a shortage of fish since over-fishing shrinks the fish population, and fishermen limiting their catches could conserve the fish supply, but most still catch as many as they can. This is because they know if they don’t kill the fish, the next fishermen will and have more supply and therefore, more profit.

            Reviewing these scenarios, this kind of competition can both improve or worsen the market depending on the increase or decrease of supply and demand.


Notes

[1]   Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. (New York: W. W. Norton & Company, 2010), 6.

[2]   Gates, Sara. “Perfume Health Risks: Fragrances Can Contribute To Health Problems Like Allergies And Rashes.” The Huffington Post. September 19, 2012. Accessed June 15, 2016. http://www.huffingtonpost.com/2012/09/19/perfume-health-risks-scents-asthma-allergies_n_1894746.html.

[3]   Ormsbee, Michael, and Matt Vukovich. “Performance Enhancing Drugs.” IDEA Health & Fitness Association. May 1, 2005. Accessed June 15, 2016. http://www.ideafit.com/fitness-library/performance-enhancing-drugs.

[4]   Pradhan, Sucheta. “Effects of Black Market on the Economy.” Buzzle. February 11, 2016. Accessed June 15, 2016. http://www.buzzle.com/articles/effects-of-black-market-on-the-economy.html.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s