Through the Veil of Ignorance: Understanding Social Welfare

Abstract

The most common perspective of game theory is that of an individual decision-maker, who attempts to make a decision about what to do in an attempt to bring about the most preferred outcome for themselves. Such decision making in game theory is distinguished from conventional optimization problems by the fact that the consequences of an individual’s decision will depend not just on their choice, but on the choices made by others. This motivates the development of solution concepts for the game theory, of which Nash equilibrium is the best-known. These solution concepts attempt to characterize how rational agents would make choices in such situations. But there is another way of thinking about games, as follows. Suppose, instead of being a player within the game, you were a benevolent omniscient external entity, who was able to simply choose the outcome for the game.