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Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 – however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 – however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. In the absence of any agreement, the outcome of this game will be

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In The absence of any form of agreement the outcome that would be here would be Wisconsin not cleaning the lake, Illinois cleaning the lake.

What is game theory?

This is the theory that is used in economics to determine the best possible payout for two companies.

It tells us of the strategies that both parties would have to put in place when they are stuck at competitive positions.

Cleaning of polluted lake is going to bring about positive externalities and society will be the one to benefit.

For Wisconsin

Cost of cleaning  = 1200 ;

benefit = 1500

But the payout is 1100, hence Wisconsin losses 100

For Illinois

cost of cleaning is 700

social benefit to society is 900

They would receive 600 and also lose 100.

The gain Illinois receives from Wisconsin is 400 while the gain Wisconsin receives from Illinois is 300.

So we to conclude that The best thing would be Wisconsin not cleaning the lake, Illinois cleaning the lake.

Read more on game theory here:

https://brainly.com/question/14347653

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