Coase Solution

This game focuses our attention on the socially optimal choice and the Nash Equilibrium. By using a Coase Solution, it may be possible to reach the optimal solution. The Neighbours: The Drive to Work.

Two neighbours, Bob and Jane, work together at a bank. They know if they work together in their choice of transportation, they will both prosper.

If one person leaves home early and the other leaves late, the early person will accrue a bonus of $18 and the late person will accrue a bonus of $2.

If they both leave early, they will each receive a bonus of $8.

If they both leave late, they will each receive a bonus of $5

A. Construct a payoff matrix for both players that capture the essence of the decision mechanism that exists.

B. If there is a Nash Equilibrium, explain what it is?

C. Is this the Socially Optimal Solution?

D. How can we arrive at this solution?