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Lemons, Market for

The closely related problems of information asymmetry and adverse selection were first addressed by George Akerlof in his 1970 paper “The Market for ‘Lemons.’” The primary example of the problem in Akerlof’s paper was the market for used cars, in which sellers know the quality of the product but buyers only know the average quality based on previous used car sales. Akerlof assumed that there were two types of used cars on the market, which we might call “lemons” (bad) and “cherries” (good), with a full range of varying quality. In a simple argument based on the notion that ignorant buyers would only be willing to pay the average (expected) value of the existing mix of lemons and cherries for a used car of unknown ...

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