Question 3

Spain and Italy are also members of the European Union. Their membership in the union prevents them from imposing tariffs on each other's goods and services. This question will explore how the penalties for breaking EU trade rules might alter countries' behavior.

Spain and Italy can independently choose to impose a tariff on imports form the other country. The normal form game below depicts the payoffs associated with each possible outcome of this interaction. Importantly, the values below do not take account of any possible penalties for breaking EU trade rules.

Impose Don't Impose Tariff Tariff Impose Ta riff Don't Impose Tariff I: 0 hilhn