Question

Explain how the prisoner’s dilemma works? How is it an example of market failure?

Answer 1

Prisoners dilemma is a paradox in the decision making process, where two market players are moving towards their own self-interest. In doing so they do not act in cordial way which results in a big expense/loss to the other player. As a result of this they find themselves in a worse state than in case if they have cooperated with each other.

It is a perfect example of market failure, the more relevant and recent example is Brexit.

In 2016, UK and Europe caught in the prisoners dilemma when UK decided to leave the EU by invoking Article 50. Now in the two year time frame which UK got, both UK and Europe were acting in self-interests while sitting on negotiation table.