Final answer:
In coordination problems, individual and collective interests align, whereas in cooperation problems like the prisoner's dilemma, individuals face incentives to act against the collective good. Collective action problems occur when individual's rational self-interest choices harm the group. Solving these problems involves balancing transaction and conformity costs.
Step-by-step explanation:
In a coordination problem, what is optimal for an individual aligns with the collective interest when everyone chooses a mutually beneficial strategy. By contrast, cooperation problems, such as those illustrated by the prisoner's dilemma, present a situation where individuals have strong incentives to act in their self-interest which is not socially beneficial. The collective action dilemma arises as individuals, acting rationally in pursuit of their self-interest, undermine the collective good, leading to suboptimal outcomes for both the group and ultimately themselves.
Collective action problems involve a disconnect between individual incentives and the group's interest. For instance, the free rider problem is a typical collective action problem where individuals choose not to contribute to a public good while still benefiting from it if it is provided by others. Resolving these dilemmas often involves finding a balance between transaction costs, the expenses associated with making a decision, and conformity costs, the loss of individual preferences in group decisions.
To address coordination problems, decision-making can be delegated to a single authority to reduce transaction costs or decisions can be made through group consensus to reduce conformity costs. However, each approach has its trade-offs and requires careful consideration of the implications on both individual and collective levels.