Where situations involve a misalignment between self-interest and collective interest, we can use collective action models.

In a collective model, individuals can choose to free rise or contribute. If every individual contributes, the sum of payoffs is maximised. An individual who free rides, get to keep a higher pay-off for themselves but the collective suffers.

There are three models in this chapter :

a) Public Goods.

When it comes to public goods like paying for the environment or defence, contributions to the public good attain diminishing returns as more contributions are made but contribution to privates have a pay-off that varies linearly with contribution. This creates a gap as the socially optimal allocation to public goods becomes very large compared to the equilibrium allocation.

Society becomes worse off when folks act on their best interests and do not sustain public services.

To resolve the public goods issue, societies levy a tax and make it compulsory to