Use the following information to work Problems 2 and 3. The United States claims that Canada subsidizes the production of softwood lumber and that imports of Canadian lumber damage the interests of U.S. producers. The United States has imposed a tariff on Canadian imports to counter the subsidy. Canada is thinking of retaliating by refusing to export water to California. Table 1 shows a payoff matrix for the game that the United States and Canada are playing.
2. What is the United States’ best strategy? What is Canada’s best strategy? What is the outcome of this game? Explain.
3. Is this game like a prisoners’ dilemma or different in some crucial way? Explain. Which country would benefit more from a free trade agreement?