Externalities, Public Goods
The Environmental Trade-Off
The Environmental Trade-Off is an Externalities and Public Goods scenario. The core lesson: Externalities are the gap between what something costs the person making the decision and what it costs everyone else. A factory employs 400 people in a low-income community and has operated for 30 years. It also discharges pollutants into a river used by a downstream community of 8,000. DecisionPlay maps the players, payoffs, and equilibrium dynamics that shape how this situation typically resolves.
The situation
A factory employs 400 people in a low-income community and has operated for 30 years. It also discharges pollutants into a river used by a downstream community of 8,000. You're a state environmental regulator. The factory is technically in compliance with regulations written 20 years ago.
Background
Environmental externalities are the canonical example of a market failure: the factory's private costs don't include the health costs it imposes on others. Regulatory economics offers three main tools, Pigouvian taxes, cap-and-trade systems, and direct standards, each with different efficiency and distributional properties. The deeper challenge is that the 400 people with jobs are visible and organized, while the 8,000 downstream are diffuse and often politically weaker.
What this reveals
Externalities are the gap between private and social costs
When decision-makers don't bear all the costs of their decisions, they will systematically make decisions that are privately rational but socially harmful. Fixing externalities requires making the gap visible and imposing the cost on the person creating it.
How to counter it: Ask who bears the costs of this decision that are not reflected in the price. Those people have the weakest voice in the decision and the strongest claim to protection.
A question to sit with
Who bears the costs of decisions you make that you don't see directly, in your work, your consumption, your community? Are those costs visible to the people making the decisions?
Frequently asked questions
- What game theory concept does The Environmental Trade-Off illustrate?
- The Environmental Trade-Off illustrates Externalities, Public Goods. Externalities are the gap between what something costs the person making the decision and what it costs everyone else.
- What is the situation in The Environmental Trade-Off?
- A factory employs 400 people in a low-income community and has operated for 30 years. It also discharges pollutants into a river used by a downstream community of 8,000. You're a state environmental regulator.
- What does The Environmental Trade-Off reveal about how people decide?
- Externalities are the gap between private and social costs. When decision-makers don't bear all the costs of their decisions, they will systematically make decisions that are privately rational but socially harmful. Fixing externalities requires making the gap visible and imposing the cost on the person creating it.
- How do you avoid the trap in The Environmental Trade-Off?
- Ask who bears the costs of this decision that are not reflected in the price. Those people have the weakest voice in the decision and the strongest claim to protection.
- What is the research behind The Environmental Trade-Off?
- Environmental externalities are the canonical example of a market failure: the factory's private costs don't include the health costs it imposes on others. Regulatory economics offers three main tools, Pigouvian taxes, cap-and-trade systems, and direct standards, each with different efficiency and distributional properties. The deeper challenge is that the 400 people with jobs are visible and organized, while the 8,000 downstream are diffuse and often politically weaker.
- How long does The Environmental Trade-Off take to play?
- About 10 min, at core difficulty, across 4 decision points. It runs in your browser with no account and no sign-in.
Keep exploring
More Civic & Policy scenarios, or browse all scenarios. New to this? Start with how DecisionPlay works or the game theory glossary.
Topics: externalities, environmental, regulation, equity