Not only would it create the prisoner's dilemma but all other malicious activity would be multiplied to an extent that it would plague the entire blockchain sending ripples throughout the system resulting in a shitstorm of unimaginable proportions.

hf21 will bring about some interesting times indeed. Will flag selling outweigh "honest" curation of abusive content is anyone's guess but it will be an epic battle to combat abuse while countering newly created abuse ie buying flags to retaliate.