Consider the following one-shot game. Ben and David each choose between two strategies; one of the strategies imolies the emission of 1 unit pollution, the other leads to the emission of two units of pollution. The payoffs are as follows:

David

2 units 1 unit

Ben 2units 2,2 6,1

1unit 1,6 5,5

1/FInd all Nash equilibria.

2/Design a tax that will change the Nash equilibrium and make both players better off. Specify the new after-tax payoff matrix and describe the new Nash equilibrium.

3/What are the payoffs to Ben and David and what is the total tax revenue from the tax?

4/What will be the payoffs to Ben and David if the revenue is distributed equally to the players?