Failures of Capitalism: The Prisoners Dilemma

How a simple thought experiment demonstrates a deep problem with free markets.

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  • However if you are unlucky and he also snitches on you, you’ll both get 2 years of prison.
  • If both stay silent, each one will get 1 year of prison.
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How many years of prison each prisoner will get, depending on whether they snitch (betray) or stay silent and loyal to each other. Bottom right is the optimal choice.

Real World Examples of Prisoners Dilemma

Whether dealing with political ads or ads for products, one ends up with a prisoners dilemma. For society it is no gain that enormous amounts of money e.g. is spent on political campaigns and it doesn’t really benefit the individuals running for office either.


However if you spend minimal on advertisement and your opponent spends a lot, your opponent is likely to get an advantage over you.

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Cocoa Cola and Pepsi ads are a perfect example of prisoners dilemma. Both brands are already well known, so it is not like they need ads to make consumers aware of their brand. However the prisoners dilemma dictate that they must both engage in an ad’s arms race or see the competition gain marketshare.

Poverty and Pollution

It also explains why solving major problems such as pollution, high inequality or poverty is hard to achieve in a market.

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Factories have no strong incentive to clean up (apart from regulation and reputation), since they are marginally affected by pollution. Pollution affects everybody, but nobody wants to be the sucker taking responsibility while the rest freeloads on fresh air and water.

Employers and Employees

Employer and employees benefit from investment in training. The employer gets a more skilled employee who can do a better job, and the employee can get better pay.


While free market capitalism is a great system for producing many goods and services, the prisoners dilemma is one of several reasons I will cover, why certain goods and services are often provided through other means than the market. Health care, education, fire service, police, railroads, prisons etc are some examples of services which frequently is provided by public institutions, funded by tax payers.

Geek dad, living in Oslo, Norway with passion for UX, Julia programming, science, teaching, reading and writing.

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