This is the prisoner’s dilemma – famous across the wide expanse of economics – as described in this article about Nobel Prize winners:
The police arrests two criminal partners and puts each in a solitary confinement where they cannot communicate. If neither of the criminals cooperates with the police, they will send each criminal in jail for one year. If one criminal testifies against his partner, he will go free while the partner will get three years in prison. If both prisoners testify against each other, both will get two years in jail.
Nash Equilibrium is when no game participant can improve his outcome when all other participants keep their strategy. In Prisoner’s Dilemma, such equilibrium happens when both criminals testify against each other and get two years each. If either of them changes strategy, he gets an extra year in jail. Of course, both criminal partners will be better off if neither of them testify since they will get one year each. However, in such case either of them can improve his outcome by testifying. Nash Equilibrium in Prisoner’s Dilemma shows that egoistic strategies in non-cooperative games can lead to common bad.
It is true, of course, that these two crims both go to jail an extra year each because for each of them their optimal strategy is to rat on the other. But good, they should both go to jail and for the longer time. From their own point of view they are worse off, but from a social perspective this outcomes seems all right to me. Where’s the “common bad”?
Are there outcomes where from a social perspective we all end up worse off because each person does what is best for themselves? There no doubt are, but the most famous of all examples does not demonstrate that society is the worse off because of the dilemma these two criminals face.
Incidentally, the article also points out that Paul Krugman is the most googled Nobel Prize winner in economics. I don’t know what it shows other than that hits on google is a very bad indicator of the value of what an economist has to say.