The term describes a situation where a group of individuals, acting independently and rationally to pursue their own self-interests, ultimately deplete a shared resource, even when it is clear that doing so is not in anyones long-term interest. A common example involves overfishing: individual fishermen maximize their catch, leading to the depletion of fish stocks, ultimately harming all fishermen in the long run due to scarcity.
Understanding this phenomenon is crucial for addressing various real-world problems, ranging from environmental issues like pollution and deforestation to economic issues such as resource management and public goods provision. Its importance lies in highlighting the conflict between individual rationality and collective well-being, which is essential for crafting effective policies and interventions. Its roots can be traced back to classic game theory and the study of collective action problems.