Market for Lemons

George Akerlof developed the idea of the market for lemons to explain problems related to information asymmetries in markets. “Lemons” refer to used cars that are of poor quality. If there are two types of cars on the market—those of high quality (“cherries”) and those of low quality (“lemons”)—and the buyers and sellers can easily determine which category a cars falls into, then both types of cars will be sold and high-quality cars will sell for a higher price than low-quality cars. In the real used-car market, however, there is an information asymmetry problem because the sellers of cars know more about the quality of cars than the potential buyers. Because the quality of a used car may be difficult and costly for the buyer ...

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