Why is the size of the action potential so much smaller when external
sodium concentration is reduced?

The action potential is formed when a stimulus causes sodium ion
channels on the membrane to open causing a slight depolarization of
the membrane. The slight depolarisation of the cell then stimulates
more sodium channels to open generating  the action potential. If the
sodium concentration is reduced, there are less sodium ions to pass
through the channels, and the depolarisation will not be as
significant, since the sodium equilibrium potential will be lower.

thanks!