Suppose the states of Wallonia and Flanders are trying to contain a (non-fatal) pandemic between them. On January 1st, they each have the choice to leave their borders open or closed for a year. The effects on economic activity of each strategy are as follows:

If both states remain open, then the pandemic cause a total economic loss of $15 million on each of the states economies.

If both states close their borders, the pandemic only costs each state $7 million, however reduced interstate mobility generates further costs of $10 million for each state.

If one state remains open whilst the other remains closed, the open state suffers economic costs of $17 million due to the pandemic, and a further $1 million due to reduced mobility into the other state. The state that closed its borders only suffers costs from the pandemic of $5 million, but reduced mobility generates $8 million of further economic losses.

1. Today is December 31st. If you were advising the Government of Flanders, what would you recommend they do and why?

2. Suppose it now costs an extra $4 million to patrol borders and enforce their closure. Draw the new payoff matrix and identify all Nash equilibria (if any).

3. Under the conditions of part C, would your recommendation in B change? Why or why not?