The Paradox of Collective Action is a situation where more than one party is involved in an action but they fail to reach a better Nash Equilibrium because of the free-rider and information problem. The existence of externalities is the main assumption of the concept.
Rational individuals, aiming at maximizing their personal pay-off (instead of group pay-off), will not always cooperate as there is a fear that other parties will defect. This is because a committed individual who makes a lot of effort, will lose out when other parties cheat and do nothing. The paradox is commonly observed in the provision of public goods.
To illustrate with an example we assume two residents, A and B, have a choice to clean the house. If A and B both decide to clean the house, they will miss the World Cup match but, nevertheless, gain utility from living in a decent environment. If one knows another person is cleaning, they will decide to relax and watch the match. The cleaner will lose utility from doing all the hard-work alone. If both do not clean the house, everything will stay the same. Look at the following table:
|A\B||Clean the house||Watch World Cup|
|Clean the house||(5,5)||(-10,10)|
|Watch World Cup||(10,-10)||(0,0)|
10. Hence, we know that watching the World Cup becomes a dominant strategy of both and it is the pure strategy for Nash Equilibrium. This conclusion shows that none of them will cooperate to clean the house.
The Cooperation problem is not limited to individual level. In real life, the Paradox of Collective Action can be widely applied to economics, political science or even international relations. It is observed that nations often have weak incentives in reducing carbon-admission due to the Paradox of Collective Action. There are possible solutions which include contracting, commitment and defining property rights. However, it is also difficult to apply these solutions when enforcement costs are extremely high at international level.
Dominant Strategy – The most preferable strategy regardless of what other players choose.
Externality – A positive or negative spill-over effect from the action of an economic agent on another person who is not involved in that original activity.
Nash Equilibrium – When every player is playing the strategy which is their best response to the strategies being played by all other players.