What is Lemons Market

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What is Lemons Market?

The important example of market with asymmetric information is the market for lemons. In the market for lemons the buyer’s as sellers have different information about the quality of the goods being bought and sold. The words lemon is used to describe a defective or low quality product let us consider the market for used cars. We assume that the used cars are of different qualities some of them are of good quality while other is just lemons.

The bad quality car (lemons) quite often breaks down and requires lot of reprise. However while the sellers of used cars fully know the quality of their used cars, the buyers are uncertain about their quality due to lack of information. Therefore the market for used cars is an important example of asymmetric information. It is important to note that though some of he used cars available for sale are of bad quality, but all sellers who used cars whether of goods quality or bad quality claim that their car is of good quality.

The buyers of course cannot know which of he used cars are of good quality and which are just lemons. Therefore the pride of the used car in the market deepens on the average quality of the used car offered for sale. Thesis because the buyers being uninformed about the quality of the use cars will not be sale. This is because the buyers being uninformed about the quality of the used cars will intone willing to pay more than what an average quality used car is worst.

This means that the however of bad quality acres will het price of their used cars more then what they are worth. This has an important consequence since the owners of good quality use cars will not be able to get the price for their better quality cars since the price demean into eh market for used cars will be weal only to what average quality used airs are worth. as a result the owners of goods quality used cars will withdraw their cars form the market.

This will reduce the number of used cars available for sale in the market. With this the average quality of used cars offered for sales will also go down and so also the price of the used cars. This will cause some more car owners whose used cars are relatively of good quality to go out of the market of used cars. This process of withdrawing from the market for used cars will go on until only bad quality used cars that are lemons are left for sales in the market. This phenomenon is called adverse selection as due to asymmetric information on the part of sellers and buyers the bad quality products derive out the goods quality products from the market.