Hermaphroditism does happen. It's actually extremely common in plants. It's not at all rare among invertebrates. It's rare, though it does happen, in vertebrates.
The great thing about hermaphroditism is that it doubles your chances for a date on Saturday night. The down side is that it takes you twice as long to get ready: you have to do your hair and makeup AND you still have to pay for dinner*.
That's it in a nutshell: hermaphrodites have to work twice as hard. They need to prepare both sets of organs. That's a lot of extra effort, and it's not really necessary. Sexual dimorphism gives you all of the same advantages, with only a tiny cost in finding a partner.
No matter what, you're going to get two different sets of gametes in order to have sexual selection, because there are two different strategies going on: the "seeking" gametes (e.g. pollen, sperm) and the "found" gametes (eggs). You can't have two sets of eggs; they'd never meet. And having two mobile gametes just makes it even harder for them to meet up, since either could be anywhere. If one is mobile, and the other is stationary but in a known location (i.e. another member of the species), the odds are very good that they'll find each other.
In plants, worms, and bugs, the effort of making both kinds of cells doesn't seem too terribly high. In many cases, they may actually have more trouble finding each other. The plants especially rely on a pollinator to carry pollen to another plant, and it would be a waste if it were another member of the same gender. It makes a lot of sense for them to make both sets of organs.
It's rare in vertebrates. Vertebrates can generally find each other easily. Most often, when it does occur, it's in fish. Fish swim in big, dark, 3D oceans, making it harder to find each other. Not all fish are hermaphrodites, but many are. Often, they are "sequential" hermaphrodites: they switch gender as needed.
It's essentially unknown among mammals. Mammals do pretty well at finding mates, and can specialize two genders to serve specific functions. This opens up another opportunity, sexual selection, where members compete for sexual opportunities.
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