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Friday, September 29, 2006

Microeconomics quiz of the week

From the Wall Street Journal's weekly email blast is an interesting microeconomics (well, actually game theory) problem:
SUMMARY: Two cars, each traveling at 35 mph, are approaching an intersection, which has no traffic indicators (i.e., stop signs or traffic lights). Each driver judges that the two cars will enter the intersection at the same time.

Who stops? This scenario is a classic game of chicken; and according to the article is played at most Belgian intersections. In spite of the high Belgian accident rate, the prospect of putting signs at crossroads is unpopular in the country. A Belgian transport ministry spokesperson states, "We'd have to put signs at every crossroads. We have lots of intersections." Instead, the government is in the process of making changes to a traffic rule at the heart of Belgium's problems. It is known as priorite de droite, or "priority from the right." The law evolved from a rule adopted nearly a century ago in neighboring France, intended to offer drivers a simple rule of thumb: Always yield to any vehicle coming from one's right unless a sign or other road marking instructs otherwise.

Belgium's current right-of-way rule may be leading to greater accident rates. "A driver in Belgium who stops to look both ways at an intersection loses the legal right to proceed first. Such caution might seem prudent, given the lack of stop signs. But a driver who merely taps his brakes can find that his pause has sent a dangerous signal to other drivers: Any sign of hesitation often spurs other drivers to hit the gas in a race to get through the crossing first.

The result is a game of chicken at crossings, where to slow down is to 'show weakness,' says Belgian traffic court lawyer Virginie Delannoy. Neither driver wants to lose this traffic game, she says, adding: 'And then, bam!'"

QUESTIONS:

1.) Is the brake-or-go game described in the article a game of chicken? Construct a game of chicken in which the two options available to each player are brake and go. What are the pure-strategy Nash equilibria to the game? What is the mixed strategy Nash equilibrium?

2.) Explain how right-of-way rules affect accident rates. Why may Belgium's current right-of-way rules lead to greater accident rates? How would a shift to the "priority from the right" rule affect accident rates?

3.) Discuss the benefit and cost of installing stop signs at a particular intersection. Why does one country decide to install stop signs while another chooses not to do so?

Reviewed By: James Dearden, Lehigh University

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