Regional Development Dilemma
Two adjacent cities, City A and City B, are planning major infrastructure projects. They each have two options: 1) Upgrade their own local airport, or 2) Collaborate on building a single, large regional airport located between them.
- If both upgrade their local airports, they each gain a moderate economic benefit of $50 million.
- If both collaborate on the regional airport, the increased connectivity and efficiency provide a large economic benefit of $100 million to each city.
- However, if one city commits to the regional project while the other upgrades its local airport, the regional project fails due to lack of support, and both cities end up with a net benefit of $0 due to wasted planning costs and uncoordinated transport links.
Suppose that due to historical precedent and mutual mistrust, both cities independently choose to upgrade their own local airports. Explain why this outcome, despite being worse for both than collaborating, can be considered a stable result. In your explanation, address why the principle of self-interested actions leading to a collectively optimal outcome might not apply in this scenario.
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